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.

At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

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.

Maria, a resident of Mexico City, Mexico, formed MZE Corporation in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

Supposethat at the beginning of 2020 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2020, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50percent shareholder of the S corporation?

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

The built-in gains tax does not apply to S corporations that never operated as C corporations.

SEC Corporation has been operating as a C corporation since 2017. It elected to become an S corporation, effective January 1, 2020. On December 31, 2019, SEC reported a net unrealized built-in gain of $60,000. In addition to other transactions in 2020, SEC sold inventory it owned at the beginning of 2020 (it did not sell any other assets it owned at the beginning of 2020). 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 2020, its taxable income would have been $100,000. How much built-in gains tax must SEC pay in 2020?

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 2020, 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?

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

Assume that at the end of 2020, Clampett, Incorporated (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, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Bobby T (75percent owner)would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5percent owner)does not want to terminate S corporation status. Bobby T can terminatethe Scorporation status for DJ, Incorporated, without Dallas's consent.

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $10,000, and his share of the distribution was $50,000. How muchtotal income does J.D. recognize this year from these transactions?

Assume that Clampett, Incorporated, has $240,000 of sales, $190,000 of cost of goods sold, $100,000 of interest income, and $80,000 of dividends. What is Clampett, Incorporated's excess net passive income?

Assume that at the end of 2020, Clampett, Incorporated (an S corporation)distributes property (fair market value of $43,000, basis of $6,000)to each of its four equal shareholders (aggregate distribution of $172,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,400 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder isgoverned by rules very similar to the rules for partnerships.

SEC Corporation has been operating as a C corporation since 2017. It elected to become an S corporation, effective January 1, 2020. On December 31, 2019, SEC reported a net unrealized built-in gain of $10,000. In addition to other transactions in 2020, SEC sold inventory it owned at the beginning of 2020 (it did not sell any other assets it owned at the beginning of 2020). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2020, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2020? Assume the corporate tax rate is 21%.

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?