Question 1

Identify which of the following statements is true.

Accepted Answer

A)   Convertible debt issues might be considered "stock" for purposes of the S corporation single class of stock requirement.
B)   A majority of shareholders must consent to the S corporation election.
C)   The S election must be made no later than the fifteenth day of the fourth month of the tax year for which the election is to be effective.
D)   All of the above are false. A

Question 2

Trusts that can own S corporation stock include all of the following except

Accepted Answer

A)   testamentary trusts.
B)   QSSTs.
C)   grantor trusts.
D)   charitable remainder unitrusts. D

Question 3

Which of the following items is not separately stated for an S corporation?

Accepted Answer

A)   Section 1245 income
B)   short- term capital gain
C)   charitable contribution
D)   dividend income A

Question 4

The accumulated adjustments account is the cumulative total of ordinary income or loss and separately stated items (excluding tax- exempt income and expenses) for the most recent continuous period during which the corporation has been an S corporation.

Accepted Answer

A) True 
 B)False

Question 5

Identify which of the following statements is false.

Accepted Answer

A)   The IRS can grant extensions of time of filing shareholder consents to the S election.
B)   An S election is filed by the corporation by using Form 2553 on or before the due date (without regard to any extensions)  for the corporate tax return for the tax year in question.
C)   An S corporation must file a tax return for any year in which the S corporation is in existence.
D)   The election form can be signed by a person authorized to sign the S corporation tax return.

Question 6

The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.

Accepted Answer

A) True 
 B)False

Question 7

VJ Corporation is to be owned equally by Vic and Joe. The corporation will be formed by exchanging the assets and liabilities of the V & J Manufacturing Partnership for all the corporation's stock on September 1 of the current year. Both shareholders use the calendar year as their tax year and desire to make an S election. What tax issues should Vic and Joe consider with respect to the incorporation?

Accepted Answer

The answer of VJ Corporation is to be owned equally...

Question 8

For an S corporation to elect to use a fiscal year other than a permitted year, the fiscal year elected must have a maximum deferral period of

Accepted Answer

A)   three months.
B)   six months.
C)   one month.
D)   two months.

Question 9

Mary, a U.S. citizen, owned 25% of the stock of Floran Corporation, an electing S corporation. At the time of her death, the Floran stock may go to all the following without affecting the S election except

Accepted Answer

A)   a charitable remainder unitrust.
B)   a small business trust.
C)   a testamentary trust.
D)   her estate.

Question 10

Which of the following would terminate a Subchapter S election?

Accepted Answer

A)   Voting trust becomes a shareholder.
B)   Grantor trust becomes a shareholder.
C)   Estate becomes a shareholder.
D)   Partnership becomes a shareholder.

Question 11

A corporation must make an S election for the current year after March 15 in the case of a calendar- year corporation.

Accepted Answer

A) True 
 B)False

Question 12

Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2008. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2008, but had $200,000 of ordinary income. In 2009, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2008?

Accepted Answer

A)   $200,000
B)   $50,000
C)   $0
D)   $100,000

Question 13

Dilley Corporation is an electing S corporation that uses a calendar year as its tax year. On October 31, Dilley's S election is terminated because of the acquisition of stock by an ineligible stockholder. Dilley Corporation shareholder Alan is allocated an S corporation loss for the year, which cannot be used because of the basis limitation. Alan will lose the unused loss if not used by

Accepted Answer

A)   December 31 of this year.
B)   March 15 of next year.
C)   December 31 of next year.
D)   October 31 of next year.

Question 14

An S corporation reports ordinary income of $120,000 after deducting $20,000 for Fred's salary. Fred and his three children own the S corporation equally. The IRS determines Fred's stock transfer to his three children is not bona fide. Reasonable compensation for Fred is $40,000. How much of the S corporation's $140,000 pre- salary income must be reported by Fred?

Accepted Answer

A)   $40,000
B)   $100,000
C)   $50,000
D)   $140,000

Question 15

Zinc Corporation is created in the current year and promptly makes an S election. How much passive income can it earn this year without fear of losing its S corporation status or being subject to the Sec. 1375 tax on excess net passive income?

Accepted Answer

The answer of Zinc Corporation is created in the current...

Question 16

Identify which of the following statements is true.

Accepted Answer

A)   Shareholders who acquire stock in an S corporation after the election date and prior to the election's effective date must consent to the election.
B)   Only shareholders who own stock on the date an S election takes effect must consent to the election.
C)   S corporation consent by shareholders is binding on the current tax year and all future tax years.
D)   All of the above are false.

Question 17

Arnie is a 50% shareholder in Energy Corporation, an S corporation. The S corporation had an $80,000 ordinary loss last year and $10,000 of ordinary income this year. Before accounting for last year's losses, Arnie's basis in his Energy stock is $32,000 and Energy owed Arnie $4,000 (an unsecured note having a basis of $4,000) at the end of last year. In addition, Energy had $100,000 of other liabilities owed to creditors other than Arnie at the end of last year. What income and loss must Arnie report on his current return as a result of owning the Energy stock (ignoring the at- risk and passive activity limitations)?

Accepted Answer

The answer of Arnie is a 50% shareholder in Energy...

Question 18

Krause Corporation makes an S election, believing that it has no current or accumulated E&P. However, after an IRS audit, Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C E&P balance from its three pre- election tax years. The IRS will

Accepted Answer

A)   retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
B)   automatically terminate the election and Krause cannot reelect for a 5- year time period.
C)   treat the error as such and allow the election to continue unbroken.
D)   likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C E&P.

Question 19

Connie's Restaurant has been an S corporation since it was formed in 2006. Its results for the previous year are as follows: $\begin{array}{lr}
\text { Sales } & \$ 200,000 \
\text { Supplies } & 90,000 \
\text { Salaries } & 50,000 \
\text { Depreciation } & 5,000 \
\text { Interest on business loan } & 1,000\
\text { Charitable contributions } & 3,000 \
\text { Advertising } & 4,000 \
\text { Utilities expense } & 6,000 \
\text { Property taxes } & 1,000 \
\text { Gain on the sale of } & \
\quad \quad \text { investment land (long-term) } & 8,000
\end{array}$ What are Connie's separately stated items? What is the S corporation's ordinary income?

Accepted Answer

The answer of Connie's Restaurant has been an S corporation...

Question 20

The Vanity Corporation organized and began operations in January. The corporation's ten equal shareholders elect to have Vanity taxed as an S corporation, and the election and necessary consents are filed in a timely manner. For its first tax year ended December 31, Vanity has ordinary income of $64,000 and short- term capital gains of $16,000. During the year, it distributes $30,000 in cash equally to its ten shareholders. For the year, how much income should each shareholder report and how should it be characterized?

Accepted Answer

The answer of The Vanity Corporation organized and began operations...

Exam 11: S Corporations

Identify which of the following statements is true.

Trusts that can own S corporation stock include all of the following except

Which of the following items is not separately stated for an S corporation?

The accumulated adjustments account is the cumulative total of ordinary income or loss and separately stated items (excluding tax- exempt income and expenses) for the most recent continuous period during which the corporation has been an S corporation.

Identify which of the following statements is false.

The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.

For an S corporation to elect to use a fiscal year other than a permitted year, the fiscal year elected must have a maximum deferral period of

Mary, a U.S. citizen, owned 25% of the stock of Floran Corporation, an electing S corporation. At the time of her death, the Floran stock may go to all the following without affecting the S election except

Which of the following would terminate a Subchapter S election?

A corporation must make an S election for the current year after March 15 in the case of a calendar- year corporation.

Zinc Corporation is created in the current year and promptly makes an S election. How much passive income can it earn this year without fear of losing its S corporation status or being subject to the Sec. 1375 tax on excess net passive income?

Identify which of the following statements is true.