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Exam 22: S Corporations

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Question 61

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Clampett, Inc. converted to an S corporation on January 1, 2014. 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, 2014?

A) $30,000 net built-in gain.
B) $10,000 net built-in gain.
C) $0 net built-in gain.
D) $20,000 net built-in loss.
E) None of these.

F) All of the above
G) A) and E)

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Question 62

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

A) True
B) False

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Question 63

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Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

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 2014, 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?

During 2014, CDE Corporation (an S corporation since its inception in 2012) 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 $130,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

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

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Lamont is a 100% owner of JKL Corporation. JKL has been an S corporation since its inception in 2014. During 2016, JKL distributed $20,000 to Lamont. During 2016, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain, if any, Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2016 in each of the following scenarios? a. Lamont's stock basis at the beginning of the year was $30,000. b. Lamont's stock basis at the beginning of the year was $4,000.

Which of the following statements is correct?

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2014, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C Corporation Zach, Inc. Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

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

Suppose at the beginning of 2014, 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 2014, 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. What is Jamaal's stock and debt basis at the end of 2014?

S corporation shareholders are not allowed to include any S corporation debt in their stock basis.

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.

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

Suppose SPA Corp. was formed by Sara Inc. (a C corporation that is 100% owned by Sara) and Sara's friend Tyson. In exchange for 50% of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50% of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000. How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

Hector formed H Corporation as a C corporation at the beginning of 2014. Hector was the sole shareholder of H Corporation. H Corp. reported 2014 taxable income (and earnings and profits) of $200,000. At the beginning of 2015, H Corp. elected S corporation status. During 2015, 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 2015?