Exam 22: S Corporations

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.

The estimated tax rules for S corporations generally follow the rules for C corporations.

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

Suppose Clampett, Inc. terminated its S election on August 28, 2016. 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 2017, 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 2017?

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.

During 2016, CDE Corporation (an S corporation since its inception in 2014) liquidates this year 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?

RGD Corporation was a C corporation from its inception in 2012 through 2015. However, it elected S corporation status effective January 1, 2016. RGD had $50,000 of earnings and profits at the end of 2015. RGD reported the following information for its 2016 tax year. What amount of excess net passive income tax is RGD liable for in 2016? (Round your answer for excess net passive income to the nearest thousand)

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

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

Suppose at the beginning of 2016, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2016, 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 50% shareholder of the S corporation?

Suppose Clampett, Inc. terminated its S election on August 28, 2016. 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 2017, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J. D. deduct in 2017?

Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2016, 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?

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

Clampett, Inc. converted to an S corporation on January 1, 2016. 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 2017, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2017 if it had been a C corporation. In 2018, 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 2017? In 2018?

Assume that at the end of 2016, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) 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 $50,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

Jackson is the sole owner of JJJ corp. (an S corporation). At the beginning of 2016, Jackson's basis in his JJJ stock was $8,000. For 2016, JJJ reported a ($30,000) ordinary business loss (not a passive loss) and $4,000 of long-term capital gains. Assuming Jackson's tax basis and his at risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2016?

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 the beginning 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?

S corporations offer the same legal protection to owners as C corporations.