Exam 22: S Corporations

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2016. The following assets were owned by MWC on December 31, 2015. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2016?

Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $45,000. For 2017, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2017?

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2016, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation Conner, Inc. ABC reported business income for 2016 as follows (assume that there are 365 days in the year): If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

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.

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). What is Clampett, Inc.'s built-in gain or loss on January 1, 2016?

Hector formed H Corporation as a C corporation at the beginning of 2016. Hector was the sole shareholder of H Corporation. H Corp. reported 2016 taxable income (and earnings and profits) of $200,000. At the beginning of 2017, H Corp. elected S corporation status. During 2017, 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 2017?

Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $30,000. For 2017, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2017?

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined shareholder's stock and debt basis.

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

Hazel is the sole shareholder of Maple Corp. In 2016 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2016, Maple elected S corporation status. During 2017 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2017 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

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. Assume that Clampett, Inc. never operated as a C corporation and that the corporate tax rate is 35%. What is Clampett, Inc.'s excess net passive income tax?

The IRS may consent to an early re-election of S corporation status after a termination under which of the following:

During 2016, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2017. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2016 its inventory basis under the LIFO method was $63,000. If MVC had used the FIFO method of accounting for its inventory, it would had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2016 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

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. What is J. D.'s stock basis after the distribution?

Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2016. On December 31, 2015, Neal Corp. reported earnings and profits of $150,000. Beginning in 2016, 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 S corporations would be subject to the excess net passive income tax?

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. Assume that Clampett, Inc. has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 35%. What is Clampett, Inc.'s excess net passive income tax?

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