Question 1

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

Question 2

Identify which of the following statements is true.

Accepted Answer

A) Perry Corporation, an S corporation, receives $10,000 of dividends from a 25%-owned domestic corporation. Perry is allowed an 80% dividends-received deduction with respect to the distribution. 
B) An NOL is incurred by a C corporation in the current tax year. The C corporation makes an S election for the following tax year. The entire C corporation NOL carryover can be passed through to the S corporation's shareholders at the end of the following tax year. 
C) Tax-exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the shareholders' gross income. 
D) All of the above are false.

Question 3

S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held.

Accepted Answer

A) True 
 B)False

Question 4

Shanghai Corporation was organized and elected S status in the current year. How much passive investment income can Shanghai earn and retain its S status?

Accepted Answer

A) none 
B) 80% of gross receipts 
C) 50% of gross receipts 
D) no limit

Question 5

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

Accepted Answer

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

Question 6

Corporations and partnerships can be S corporation shareholders.

Accepted Answer

A) True 
 B)False

Question 7

By electing to use the S corporation's tax accounting method to allocate profits or losses between the C short year and S short year in the termination year, the corporation can shift losses into an S short year where the shareholders obtain an immediate benefit at a marginal tax rate of up to 37%, or it can shift profits into a C short year to take advantage of the 21% corporate tax rate.

Accepted Answer

A) True 
 B)False

Question 8

Identify which of the following statements is true.

Accepted Answer

A) All of the shareholders of an S corporation must consent to a revocation of the S election. 
B) A revocation of an S corporation election can be retrospective to any date. 
C) An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C E&P. 
D) All of the above are true.

Question 9

Pressley Corporation was incorporated on January 1, 2004. The corporation made its S election on March 1, 2008. The corporation retains an E&P balance from its C corporation days. During the current year, it made a cash distribution to its sole shareholder Robert Pressley. What is the proper sequence in reducing the corporate earnings accounts for the distribution?

Accepted Answer

A) AAA; E&P 
B) AAA; OAA; E&P 
C) E&P; AAA 
D) AAA; PTI; E&P

Question 10

Potter Corporation reports the following results for the current year:  At the end of the year, Potter's Subchapter C E&P is $50,000. What is the amount of Potter's excess net passive income?

Accepted Answer

The answer of Potter Corporation reports the following results for...

Question 11

Identify which of the following statements is false.

Accepted Answer

A) Randy is a shareholder in an S corporation. His stock basis is $10,000 and his basis in a loan he made to the corporation is $3,000. Randy's share of the corporation's ordinary loss for the current year is $11,000. Ignoring the at-risk and passive activity limitations, Randy can deduct the loss in full. 
B) A shareholder's S corporation stock basis will increase when the shareholder acts as guarantor on a corporate indebtedness. 
C) A shareholder's ratable share of the S corporation's ordinary loss reduces the adjusted basis of his/her S corporation stock. Once the basis of the stock is reduced to zero, any loss-passthrough that remains reduces the basis of S corporation debts that are owed to the shareholder. 
D) Debt basis is restored before stock basis.

Question 12

Alligood Corporation has two classes of common stock outstanding. The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation. Class A stock has one vote per share. Class B stock is nonvoting. Alligood Corporation may

Accepted Answer

A) not make the S election due to different voting rights. 
B) make the S election once the Class B is retired. 
C) make the S election at any time. 
D) not make the S election due to two classes of stock.

Question 13

If an S corporation inadvertently terminates its election, the IRS

Accepted Answer

A) may permit the corporation to report as an S corporation even for the period that includes the termination date. 
B) will not permit the corporation to restore its S election until the completion of a five-year waiting period. 
C) will permit restoration of the S election only if the event causing the termination was not within the control of the corporation. 
D) will permit restoration of the S election if a majority of the shareholders consent to the reinstatement.

Question 14

Boxer Corporation, a C corporation, elects on June 30 of last year to make an S election for the current year. The net unrealized built-in gains at the beginning of the current year are $300,000. The net recognized built-in gains in the current year are $110,000. What is Boxer's built-in gains tax for the current year?

Accepted Answer

The answer of Boxer Corporation, a C corporation, elects on...

Question 15

If losses are suspended due to the lack of basis in S corporation stock, do the losses expire when the S election terminates?

Accepted Answer

The answer of If losses are suspended due to the...

Question 16

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 17

King Corporation, a cash method taxpayer that uses the calendar year as its tax year, was incorporated on June 1, 1984. The corporation made its initial S election on December 1 of last year, effective for the current tax year. Earnings and profits of $60,000 have been retained from C corporation tax years. Which one of the following events results in the recognition of a built-in gain?

Accepted Answer

A) collection of accounts receivable in the current year that resulted from services performed last year 
B) collection of interest income earned in the current year on bonds purchased on January 1 of last year 
C) collection of dividends declared on April 5 of the current year on stock purchased on February 14 of the current year 
D) None of the above are built-in gains.

Question 18

Up to six generations of a family are considered as one shareholder for purposes of the 100-shareholder limit.

Accepted Answer

A) True 
 B)False

Question 19

Power Corporation reports the following results:  At the end of the year, Power's Subchapter C E&P is $50,000. What is Power Corporation's excess net passive income and its excess net passive income tax for the year?

Accepted Answer

The answer of Power Corporation reports the following results: ...

Question 20

A testamentary trust can be an S shareholder for two years, beginning on the date the stock transfers to the trust.

Accepted Answer

A) True 
 B)False

Exam 11: S Corporations

Identify which of the following statements is true.

S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held.

Shanghai Corporation was organized and elected S status in the current year. How much passive investment income can Shanghai earn and retain its S status?

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

Corporations and partnerships can be S corporation shareholders.

Identify which of the following statements is true.

Potter Corporation reports the following results for the current year: At the end of the year, Potter's Subchapter C E&P is $50,000. What is the amount of Potter's excess net passive income?

Identify which of the following statements is false.

Alligood Corporation has two classes of common stock outstanding. The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation. Class A stock has one vote per share. Class B stock is nonvoting. Alligood Corporation may

If an S corporation inadvertently terminates its election, the IRS

If losses are suspended due to the lack of basis in S corporation stock, do the losses expire when the S election terminates?

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?

Up to six generations of a family are considered as one shareholder for purposes of the 100-shareholder limit.

Power Corporation reports the following results: At the end of the year, Power's Subchapter C E&P is $50,000. What is Power Corporation's excess net passive income and its excess net passive income tax for the year?

A testamentary trust can be an S shareholder for two years, beginning on the date the stock transfers to the trust.