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Exam 22: S Corporations

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Question 51

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During 2014, CDE Corporation (an S corporation since its inception in 2012) distributed a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

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CDE recognizes $50,000 of gain on the di...

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Question 52

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Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2014, 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?

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Question 53

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Like partnerships and C corporations, S corporations face several restrictions on using the cash method of accounting.

Assume Joe Harry sells his 25% interest in Joe's S Corp. Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp. Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

Which of the following is not a true statement?

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in Cook, Inc. after formation?

S corporation shareholders are not allowed to include any S corporation debt in their stock basis.

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000) , inventory (FMV $60,000, Basis $30,000) , accounts receivable (FMV $40,000, Basis $40,000) , and equipment (FMV $60,000, Basis $80,000) . In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000) . Assuming the corporate tax rate is 35%. How much built-in gains tax does Clampett, Inc. pay in 2015?

Suppose at the beginning of 2014, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

When an S corporation distributes appreciated property to its shareholders the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

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

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

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30 year-end as an S corporation.

Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2014, Parker's basis in his Johnson Corp. stock was $14,000. During 2014, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2015, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2014? b. What is Parker's stock and debt basis at the end of 2014? c. What is Parker's stock and debt basis at the end of 2015?

If Annie and Andy (each a 30% shareholder) file a revocation on February 10, 2014 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

Distributions to owners may not cause the AAA to go negative or to become more negative.

Which of the following is not a separately stated item for S corporations?

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.