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Exam 17: S Corporations

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Question 41

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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., never operated as a C corporation and that the corporate tax rate is 21 percent.What is Clampett, Inc.'s excess net passive income tax?

A) $0.
B) $21,000.
C) $75,000.
D) $100,000.
E) None of the choices are correct.

F) All of the above
G) B) and D)

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Question 42

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During 2019, CDE Corporation (an S corporation since its inception in 2017)liquidates this year by distributing a parcel of land to its sole shareholder, Clark.The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000.Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000.What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

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CDE recognizes $30,000 of loss on the di...

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Question 43

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Bobby T (75 percent owner)would like to terminate the S corporation status of DJ, Inc., but Dallas (5 percent owner)does not want to terminate S corporation status.Bobby T can terminate the S corporation status for DJ, Inc., without Dallas's consent.

Which of the following statements is correct?

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

The IRS may consent to an early reelection of S corporation status after a termination under which of the following?

SEC Corporation has been operating as a C corporation since 2016.It elected to become an S corporation, effective January 1, 2019.On December 31, 2018, SEC reported a net unrealized built-in gain of $60,000.In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019).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 2019, its taxable income would have been $100,000.How much built-in gains tax must SEC pay in 2019?

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

Which of the following S corporations would be subject to the 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.

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

Assume that at the end of 2019, Clampett, Inc.(an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000) .At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D.has a basis of $50,000 in his Clampett, Inc., stock.What is J.D.'s stock basis after the distribution?

Publicly traded corporations cannot be treated as S corporations.

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

CB Corporation was formed as a calendar-year S corporation.Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder.On September 30, 2019, Bryant sold his CB shares to Don.CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.) $\begin{array}{llcc}\quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \text { Period } & \text { Income } \\ \text {January 1 through September 30 (273 days) } &\$200,000\\ \text {October 1 through December 31 (92 days) } &\underline{530,000}\\ \text { January 1 through December 31 } &\underline{\$730,000}\\\end{array}$ How much 2019 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

Clampett, Inc., has been an S corporation since its inception.On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D.His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000.For 2020, J.D.was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items.How much capital gain does J.D.recognize related to Clampett, Inc., in 2020?

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is governed by rules very similar to the rules for partnerships.

During 2019, MVC operated as a C corporation.However, it made an election to be taxed as an S corporation effective January 1, 2020.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2019 its inventory basis under the LIFO method was $80,000.If MVC had used the FIFO method of accounting for its inventory, it would have had a $100,000 basis in its inventory.Finally, MVC's regular taxable income in 2019 was $5,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation.For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000.The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation.Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock.What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?