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Exam 22: S Corporations

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Question 61

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Lamont is a 100 percent owner of JKL Corporation.JKL has been an S corporation since its inception in 2019.During 2020,JKL distributed $20,000 to Lamont.During 2020,JKL reported $5,000 of business income and no separately stated items.What is the amount and character of the gain on the distribution,if any,that Lamont must recognize in each of the following alternative scenarios? Also,what is Lamont's stock basis at the end of 2020 in each of the following scenarios? a.Lamont's stock basis at the beginning of 2020 was $30,000. b.Lamont's stock basis at the beginning of 2020 was $4,000.

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Part a: Lamont does not recognize any ga...

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Question 62

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At the beginning of the year,Clampett,Inc.,had $100,000 in its AAA and $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 percent 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 income does J.D.recognize this year from these transactions?

A) $0.
B) $10,000.
C) $17,500.
D) $40,000.
E) None of the choices are correct.

F) A) and E)
G) A) and D)

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Question 63

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Assume that at the end of 2019,Clampett,Inc.(an S corporation) distributes long-term capital gain property (fair market value of $40,000,basis of $25,000) 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 $15,000 in his Clampett,Inc.,stock.How much income does J.D.recognize as a result of the distribution?

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

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?

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.In 2019,Jamaal's share of S corporation income is $4,000,and he received a $7,000 distribution from the S corporation.What is Jamaal's stock and debt basis after these transactions?

Jackson is the sole owner of JJJ Corp.(an S corporation).At the end of 2019,Jackson's basis in his JJJ stock and his at-risk amount were $0.Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax-basis and at-risk level).JJJ's S election was terminated effective the end of the day on December 31,2019.If Jackson contributes $6,000 cash to JJJ on July 1,2020,and $3,000 cash on January 5,2021,how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

Assume Joe Harry sells his 25 percent 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 29 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

Jason is one of 100 shareholders in Jace Corporation.The remaining 99 shareholders are unrelated individual U.S.residents.During the year,Jason gave several of his shares in Jace Corp.to his brother as a birthday present and to his best friend,Hal (unrelated to all shareholders in Jace Corp.),as a wedding present.After these gifts,Jace Corp.has 102 shareholders.Is Jace Corp.prohibited from electing to become an S corporation? Explain.

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

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 $63,000.If MVC had used the FIFO method of accounting for its inventory,it would have had a $70,000 basis in its inventory.Finally,MVC's regular taxable income in 2019 was $80,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax.

Vanessa is the sole shareholder of V Corporation.V Corporation was formerly a C corporation but is currently an S corporation.At the end of 2019,before considering distributions,V Corporation's accumulated adjustments account (AAA)balance was $35,000 and its accumulated earnings and profits from its years as a C corporation was $10,000.On July 1,V Corporation distributed $60,000 to Vanessa.What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

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.

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 $30,000.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?

Clampett,Inc.,converted to an S corporation on January 1,2019.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) .What is Clampett,Inc.'s built-in gain or loss on January 1,2019?

Clampett,Inc.,converted to an S corporation on January 1,2019.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 2020,Clampett,Inc.,sells its entire inventory for $60,000 (basis $30,000) .Assume the corporate tax rate is 21 percent and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2020 if it had been a C corporation.In 2021,Clampett,Inc.'s taxable income would have been $100,000 if it had been a C corporation.How much built-in gains tax does Clampett,Inc.,pay in 2020? In 2021?

S corporations face the same restrictions as partnerships and C corporations on using the cash method of accounting.

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) ?

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