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Exam 22: S Corporations

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Question 51

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Hazel is the sole shareholder of Maple Corp. In 2018 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2018, Maple elected S corporation status. During 2019 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2019 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

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The first $12,000 of the distribution co...

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Question 52

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Jackson is the sole owner of JJJ corp. (an S corporation). At the beginning of 2018, Jackson's basis in his JJJ stock was $8,000. For 2018, JJJ reported a ($30,000) ordinary business loss (not a passive loss) and $4,000 of long-term capital gains. Assuming Jackson's tax basis and his at risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2018?

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Jackson's stock basis at the end of the ...

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Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. but Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent.

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is very similar to the rules for partnerships.

Suppose SPA Corp. was formed by Sara Inc. (a C corporation that is 100% owned by Sara) and Sara's friend Tyson. In exchange for 50% of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50% of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000. How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

Suppose Clampett, Inc. terminated its S election on August 28, 2018. At the end of the S corporation's short tax year ending on August 28, J. D.'s stock basis and at-risk amounts were both zero (he has never had debt basis) , and he had a suspended loss of $20,000. In 2019, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J. D. deduct in 2019?

Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2018, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc. has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21%. Clampett, Inc.'s taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Inc.'s excess net passive income tax?

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2018, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2018?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2018, Bryant sold his CB shares to Don. CB reported business income for 2018 as follows (assume that there are 365 days in the year): How much 2018 income is allocated to each shareholder if CB corp. uses the daily method of allocating income?

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2018, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

SEC Corporation has been operating as a C corporation since 2015. It elected to become an S corporation, effective January 1, 2018. On December 31, 2017, SEC reported a net unrealized built in gain of $60,000. In addition to other transactions in 2018, SEC sold inventory it owned at the beginning of 2018 (it did not sell any other assets it owned at the beginning of 2018). At the beginning of the year, the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000. SEC sold the inventory for $35,000. If SEC had been a C corporation in 2018, its taxable income would have been $100,000. How much built-in gains tax must SEC pay in 2018?

Suppose Clampett, Inc. terminated its S election on August 28, 2018. At the end of the S corporation's short tax year ending on August 28, J. D.'s stock basis and at-risk amounts were both zero (he has never had debt basis) , and he had a suspended loss of $20,000. In 2019, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J. D. deduct in 2019?

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2018. The following assets were owned by MWC on December 31, 2017. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2018?

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $45,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2019?

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.