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Exam 11: S Corporations

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Question 31

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S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

A) True
B) False

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Question 32

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

A) True
B) False

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Question 33

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On March 15, 2019, J.D. sold his Clampett, Inc. (an S corporation) shares to Ellie Mae, Inc. (a C corporation) , terminating Clampett, Inc.'s S election on March 15, 2019. Absent permission from the IRS, what is the earliest date Clampett, Inc., may again elect to be taxed as an S corporation?

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2019, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Inc. ABC reported business income for 2019 as follows: (Assume that there are 365 days in the year.) If ABC uses the daily method of allocating income between the S corporation short tax year (January 1-April 30) and the C corporation short tax year (May 1-December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2019?

During 2019, CDE Corporation (an S corporation since its inception in 2017) 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?

The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

J.D. formed Clampett, Inc., as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2019, Jethro, Inc., sold all its shares to Jane Hathaway. On February 28, 2019, Clampett, Inc., filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

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?

Suppose Clampett, Inc., terminated its S election on August 28, 2019. 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 2020, 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 2020?

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

Suppose that at the beginning of 2019 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 he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2019?

Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019. When is the S election effective?

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.) 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. What is J.D.'s basis in his Clampett, Inc., stock after all transactions in 2020?

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

RGD Corporation was a C corporation from its inception in 2014 through 2018. However, it elected S corporation status effective January 1, 2019. RGD had $50,000 of earnings and profits at the end of 2018. RGD reported the following information for its 2019 tax year. What amount of excess net passive income tax is RGD liable for in 2019? Assume the corporate tax rate is 21%.

Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.