Exam 11: S Corporations

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 5. How much loss may J.D. deduct in 2020?

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.

Which of the following S corporations would be subject to the excess net passive income tax?

Shea is a 100 percent owner of Mets Corporation (an S corporation). Mets is a calendar-year taxpayer. On February 16, 2019, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

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?

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. What is Clampett, Inc.'s excess net passive income?

During 2019, CDE Corporation (an S corporation since its inception in 2017) liquidates 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 $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders, Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

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

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 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)?

ABC Corp. elected to be taxed as an S corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

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

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.