Exam 22: S Corporations

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Suppose at the beginning of 2017, 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 Scorporation. In 2017, Jamaal's share of S corporation income is $4,000, and he received a$7,000 distribution from the S corporation. How much income does Jamaal report in2017 from these transactions?

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.

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 J. D.'s basis in his Clampett, Inc. stock after all transactions in 2018?

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

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 thebeginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

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.

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, 2017, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2017, 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?

Which of the following is a requirement to be an S corporation?

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. but Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.

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 have considerable flexibility in making special profit and loss allocations of operating income.

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.

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is very similar to the rules for partnerships.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a40% shareholder. On September 30, 2017, Bryant sold his CB shares to Don. CB reported business income for2017 as follows (assume that there are 365 days in the year): How much 2017 income is allocated to each shareholder if CB corp. uses the daily method of allocating income?

An S corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year end.

On March 15, 2017, 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, 2017. Absent permission from the IRS, what is the earliest date Clampett, Inc. may again elect to betaxed as an S corporation?

S corporations are required to recognize both gains and losses on non-liquidating distributions of property to shareholders.

Clampett, Inc. (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Inc. are deemed to be paid in the following order:

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 thebeginning of the year is $30,000, and his share of the distribution was $50,000. What isJ. D.'s basis in the Clampett, Inc. stock after these transactions?