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Exam 11: S Corporations

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Question 31

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Like partnerships,an S corporation shareholder's basis is dynamic and must be adjusted annually.

A) True
B) False

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Question 32

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If Annie and Andy (each a 30% shareholder in an calendar year S corporation) file a revocation statement on March 20,2017 to terminate their S corporation's S election,what is the effective date of the S corporation termination (assuming they do not specify one) ?

A) January 1, 2017.
B) March 18, 2017.
C) January 1, 2018.
D) March 16, 2018.
E) None of the choices are correct.

F) A) and D)
G) None of the above

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Question 33

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MWC is a C corporation that uses the accrual method of accounting.MWC made an S election,effective January,1 of 2017.The following assets were owned by MWC on December 31,2016. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1,2017?

Unlike partnerships,adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

Clampett,Inc.has been an S corporation since its inception.On July 15,2018,Clampett,Inc.distributed $50,000 to J.D.His basis in his Clampett,Inc.stock on January 1,2018,was $30,000.For 2018,J.D.was allocated $10,000 of ordinary income from Clampett,Inc.and no separately stated items.What is the amount of income J.D.recognizes related to Clampett,Inc.in 2018?

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.

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

Hector formed H Corporation as a C corporation at the beginning of 2017.Hector was the sole shareholder of H Corporation.H Corp.reported 2017 taxable income (and earnings and profits)of $200,000.At the beginning of 2018,H Corp.elected S corporation status.During 2018,H Corp.had a rough year,reporting an ordinary business loss of $70,000,$4,000 of dividend income,and $3,000 of interest income.H Corp.also distributed $15,000 to Hector.What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA)at the end of 2018?

Which of the following is the correct order in which loss limitation rules are applied?

S corporation allocated losses to a shareholder not deductible due to the tax basis limitation rules are carried over by the shareholder to future years for potential utilization.

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

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

S corporations are required to file Form 1120S,U.S.Income Tax Return for an S Corporation,with the IRS by the fifteenth day of the fourth month after the S corporation's year end.

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

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 $30,000,and his share of the distribution was $50,000.How much,if any,of the distribution is taxable as a dividend?

Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

Maria resides in San Antonio,Texas.She formed MZE Corporation under the state laws of Texas.Maria anticipates that she will conduct her business activities in both Mexico and the United States.Is MZE eligible to elect S corporation status? Explain.

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.

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

An S corporation election may be voluntarily or involuntarily terminated.