Exam 11: Sole Proprietorships and Flow-Through Entities

For the 2018 tax year, King Corporation, a calendar-year S corporation, had an ordinary loss from operating activities of $160,000 and a long-term capital gain from the sale of investment property of $40,000. Jordan is a 40% shareholder in King Corporation and his basis in his stock at the beginning of 2018 was $50,000. On the last day of the 2018 tax year, King Corporation's outstanding debt incurred in 2017 remains $80,000, 25 percent of which ($20,000) is owed to Jordan. What is Jordan's basis in his S corporation stock and debt on January 1, 2019?

What restrictions are placed on an S corporation to be able to make a valid S election?

A person satisfies material participation requirements only through current activity.

How is an S election terminated?

The limited liability partnership form of business offers partners protection from all partnership debts.

Clarence receives a liquidating distribution of receivables (fair market value and basis both equal $20,000) and land (fair market value = $25,000 and basis = $18,000) for his partnership interest with a $70,000 basis in a liquidating distribution. What is Clarence's realized and recognized gain or loss on this distribution and his basis in the property received?

Lopez Corporation, an existing C corporation, wants to make an S election. If it has a June 30 year end, by what date must it make its election to be effective as of July 1, 2019?

A sole proprietorship:

Dominguez Corporation, a calendar-year S corporation, has book income of $54,000 ($45,000 from operations and a $9,000 net long-term capital gain). During the year, Dominquez distributes $22,500 to its three equal shareholders, all of whom are calendar year taxpayers. What is the total amount of Dominguez's ordinary income and capital gains passed through to its shareholders at the end of the year?

Simpco Partnership has gross operating revenue of $450,000, cost of sales of $150,000, salaries to employees of $40,000, a $25,000 Section 179 expense deduction, $10,000 of other depreciation, interest income of $2,000, a $4,000 capital loss, and a $500 charitable contribution deduction. Simpson is a 20 percent partner in Simpco Partnership. He has a $60,000 basis in his partnership interest at the end of the year after all income/loss items have been passed through to him. What was his beginning-of-the-year basis in his partnership interest?

A sole proprietor:

Quincy received a liquidating distribution of $5,000 cash and inventory valued at $10,000 with a basis of $6,000 for his partnership interest with a basis of $20,000. What is Quincy's basis in the inventory? Does Quincy recognize any gain or loss on this distribution?

ABC Partnership has two assets: inventory (fair market value = $20,000; basis = $25,000) and land (fair market value = $100,000; basis = $50,000) when Janine sells her 40 percent interest in ABC with a $30,000 basis for $48,000. What is the amount and type of Janine's gain or loss on the sale of her partnership interest?