Exam 11: S Corporations

S corporations are not entitled to a dividends received deduction.

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?

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within 3½ months after the beginning of the year.

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.

Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2018. On December 31, 2017, Neal Corp. reported earnings and profits of $150,000. Beginning in 2018, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the termination?

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

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.

Assume that at the end of 2018, Clampett, Inc. (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, Inc. has no corporate E&P and J. D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

Which of the following is prohibited from being an S corporation shareholder?

Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

SEC Corporation has been operating as a C corporation since 2015. It elected to become an S corporation, effective January 1, 2018. On December 31, 2017, SEC reported a net unrealized built in gain of $10,000. In addition to other transactions in 2018, SEC sold inventory it owned at the beginning of 2018 (it did not sell any other assets it owned at the beginning of 2018). 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 2018, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2018? Assume the corporate tax rate is 21%.

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

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 2018, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2018, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

Hector formed H Corporation as a C corporation at the beginning of 2018. Hector was the sole shareholder of H Corporation. H Corp. reported 2018 taxable income (and earnings and profits) of $200,000. At the beginning of 2019, H Corp. elected S corporation status. During 2019, 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 2019?

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 2018, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P 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?

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

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

Maria, a resident of Mexico City, Mexico, formed MZE Corp. 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.