Chapter 11 Flashcards
(99 cards)
1
Q
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.
A
True
2
Q
Which of the following corporate tax levies are imposed on an S corporation?
A) corporate income tax
B) corporate alternative minimum tax
C) accumulated earnings tax
D) None of these taxes are imposed on an S corporation
A
D) None of these taxes are imposed on an S corporation.
3
Q
List and discuss five advantages and five disadvantages of electing to be taxed as an S corporation over a C corporation or a partnership.
A
Some of the advantages and disadvantages which might be included in the answer are:
Advantages:
• The corporation’s income is exempt from the corporate income tax.
• The corporation’s losses are passed through to the shareholders.
• Undistributed income that has been taxed to the shareholder is not taxed again when subsequently distributed.
• Capital gains dividends and tax-exempt income are separately stated and pass through to the shareholders.
• Deductions, losses, and tax credits are separately stated and passed through to the shareholders.
• S corporations are not subject to the alternative minimum tax.
• S corporations are not subject to the personal holding company tax.
• S corporations are not subject to the accumulated earnings tax.
• S corporations may split income between family members.
Disadvantages:
• A C corporation is treated as a separate tax entity and can use the 15% tax bracket.
• S corporation earnings are taxed to the shareholder even if not distributed.
• S corporations are subject to an excess net passive income tax, LIFO recapture tax, and built-in gains tax.
• Dividends received by the S corporation are not eligible for the dividends-received deduction.
• Allocation of income and loss is based on stock owned on each day of the tax year. Special allocations are not permitted.
• The loss limitation is smaller for an S corporation than a partnership because of the treatment of general debts incurred by the S corporation.
• An S corporation and its shareholders are subject to the at-risk, passive activity, and hobby loss limitations with respect to their loss and deduction pass-throughs.
• An S corporation is restricted in the type and number of shareholders allowed and types of investments that can be made.
• S corporations are generally restricted to using a calendar year as their tax year.
The advantages and disadvantages are summarized on pages C:11-3 and C:11-4.
4
Q
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?
A
- Does the incorporation transaction qualify as tax-free under Sec. 351?
- Are there advantages to be gained by transferring the partnership’s assets to the corporation in exchange for its stock and then liquidating the partnership?
- Are there advantages to be gained by first liquidating the partnership and then transferring the assets to the corporation in exchange for its stock?
- What are the amount and character of the gain or loss recognized on the incorporation by the partnership? The S corporation? The partners?
- What is the basis of the assets to the S corporation?
- What is the basis of the S corporation stock to each shareholder?
- When does the holding period start for the assets? The S corporation’s stock?
- What tax year should the corporation elect? Does this tax year have to be the same tax year used by the partnership?
- What accounting methods should the corporation elect? Do these accounting methods have to be the same accounting methods used by the partnership?
- What procedures must be followed to make an S election?
- By what date must the corporation make the election?
- What format does the election take?
- What consents are required of the shareholders?
One underlying question that might be brought up is: Should the tax practitioner and the transferor consider using an LLC instead of an S corporation?
The method of incorporation does matter. In fact, the entity making the selection does not have to be a corporation. Under the check-the-box regulations, a noncorporate entity can elect to be taxed as a corporation and then make a selection. The tax consequences (gain recognized, basis amounts, etc.) can be different depending on which of the three basic methods are used to terminate the partnership and transfer the assets to the corporation. The three methods are: (1) the partnership transfers assets to the corporation in exchange for stock, and the partnership transfers the stock to its partners in liquidation; (2) the partnership transfers assets to its partners in liquidation, and the former partners transfer the assets to the corporation in exchange for stock; and (3) the partners transfer their partnership interests to the corporation in exchange for stock, and the partnership transfers the assets to the corporation in liquidation. Without further information, the gain and basis amounts cannot be determined, nor can we say which of the three ways is best. The S corporation can use a tax year different from the partnership, but it does have to be a required year. Likewise, the S corporation can elect any accounting method that it chooses, without regard to the method employed by the partnership. The corporation must file an S election (Form 2553) in a timely manner and the appropriate consents must be obtained from the shareholders. A transfer of assets from a partnership to an LLC is covered by rules different from a corporate formation (see Chapter C10).
5
Q
Up to six generations of a family are considered as one shareholder for purposes of the 100-shareholder limit.
A
True
6
Q
Corporations and partnerships can be S corporation shareholders.
A
False
7
Q
A testamentary trust can be an S shareholder for two years, beginning on the date the stock transfers to the trust.
A
True
8
Q
Identify which of the following statements is true.
A) 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.
B) A partnership can elect to be taxed as a corporation under the check-the-box regulations. As a corporation, an S election can be made.
C) For C corporations that desire to be taxed like a partnership, the S corporation rules provide a practical alternative for an existing C corporation to obtain many of the tax benefits of being taxed as a partnership.
D) All of the above are true.
A
D) All of the above are true.
9
Q
Identify which of the following statements is true.
A) A partnership can be an S corporation shareholder.
B) A nonresident alien can be an S corporation shareholder.
C) An S corporation can have more than 100 shareholders, since families are treated as a single shareholder.
D) All of the above are false.
A
C) An S corporation can have more than 100 shareholders, since families are treated as a single shareholder.
10
Q
Which one of the following individuals or entities is ineligible to be an S corporation shareholder?
A) an estate
B) resident alien of the United States
C) a voting trust where all of the beneficiaries are U.S. citizens
D) a partnership where all of the partners are U.S. citizens
A
D) a partnership where all of the partners are U.S. citizens
11
Q
Which of the following statements about stock ownership is not correct?
A) A C corporation can own stock of an S corporation.
B) An S corporation can own stock of a C corporation.
C) A tax-exempt charity can own stock of an S corporation.
D) An S corporation can own stock of a Qualified Subchapter S Subsidiary.
A
A) A C corporation can own stock of an S corporation.
12
Q
Trusts that can own S corporation stock include all of the following except A) charitable remainder unitrusts. B) QSSTs. C) grantor trusts. D) testamentary trusts.
A
A) charitable remainder unitrusts.
13
Q
Which one of the following is not one of the corporation-related requirements for S corporation status?
A) The corporation must be a domestic corporation.
B) The corporation must not have any foreign-sourced income.
C) The corporation must not be an “ineligible” corporation.
D) The corporation must have only one class of stock.
A
B) The corporation must not have any foreign-sourced income.
14
Q
Identify which of the following statements is true.
A) A trust can own S corporation stock and have a C corporation as a beneficiary as long as the corporation is the sole beneficiary.
B) A QSST is an arrangement whereby the stock owned by a number of shareholders is placed under trust control for purposes of exercising the stock voting rights.
C) A testamentary trust can be converted into a QSST trust.
D) All of the above are false.
A
C) A testamentary trust can be converted into a QSST trust.
15
Q
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 A) her estate. B) a testamentary trust. C) a small business trust. D) a charitable remainder unitrust.
A
D) a charitable remainder unitrust.
16
Q
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
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.
A
C) make the S election at any time.
17
Q
Identify which of the following statements is true.
A) An S corporation cannot own any stock of another corporation.
B) An S corporation cannot own 100% of the stock of another S corporation.
C) An S corporation that owns all of the stock of a Qualified Subchapter S Subsidiary (QSub) must report all the income, deductions, and losses of the subsidiary on its own tax return.
D) All of the above are true.
A
C) An S corporation that owns all of the stock of a Qualified Subchapter S Subsidiary (QSub) must report all the income, deductions, and losses of the subsidiary on its own tax return.
18
Q
Identify which of the following statements is true.
A) Convertible debt issues might be considered “stock” for purposes of the S corporation single class of stock requirement.
B) 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.
C) A majority of shareholders must consent to the S corporation election.
D) All of the above are false.
A
A) Convertible debt issues might be considered “stock” for purposes of the S corporation single class of stock requirement.
19
Q
Martha, a U.S. citizen, owns 40% of the stock of George Corporation, an electing S corporation. At the time of her death this year, the George stock passes to her estate. The stock is subsequently transferred to a trust provided for in Martha’s will. Can the testamentary trust hold the George stock for a two-year period before the S election is terminated?
A
The trust can hold the S corporation stock for an indefinite period of time only if the trust’s income beneficiary makes an election to have it treated as a QSST or small business trust. Otherwise, the S election will be terminated at the end of the two-year period.
20
Q
Shamrock 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 has one vote per share. Class B is nonvoting. Can Shamrock Corporation make an S corporation election?
A
Yes, since Shamrock Corporation is treated as having only one class of stock outstanding.
21
Q
The election of Subchapter S status by a corporation is valid only if all shareholders consent to the election.
A
True
22
Q
A corporation must make an S election for the current year after March 15 in the case of a calendar-year corporation.
A
False
23
Q
All shareholders must consent to the revocation of S status.
A
False
24
Q
Even if the termination of an S election is considered to be inadvertent, the election to terminate is irrevocable.
A
False
25
```
Which of the following would terminate a Subchapter S election?
A) Estate becomes a shareholder.
B) Grantor trust becomes a shareholder.
C) Voting trust becomes a shareholder.
D) Partnership becomes a shareholder.
```
D) Partnership becomes a shareholder.
26
Identify which of the following statements is true.
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) S corporation consent by shareholders is binding on the current tax year and all future tax years.
C) Only shareholders who own stock on the date an S election takes effect must consent to the election.
D) All of the above are false.
B) S corporation consent by shareholders is binding on the current tax year and all future tax years.
27
```
A C corporation was formed five years ago and is a fiscal-year taxpayer with a June 30 year-end. The C corporation wants to make an S election for its tax year beginning in the current year. The election must be made by ________ (assuming permission can be obtained to continue using the fiscal year from the IRS).
A) June 30 of the current year
B) September 15 of the current year
C) June 30 of the next year
D) September 15 of the next year
```
B) September 15 of the current year
28
Helmut and Sergei own all the stock of Zappo Corporation, a calendar-year domestic corporation. On January 30 of the current year, Sergei sells his entire interest in the Zappo stock to Nils. All three individuals are U.S. citizens. Can an S election be made for the current year?
A) not for the current year but for the next year
B) Yes, if Helmut and Nils agree to report all of the corporation's income for the entire year
C) Yes, if Sergei will also join in the election with Helmut and Nils
D) Yes, if Helmut and Nils agree to file a short-period return and Sergei also agrees to the return
C) Yes, if Sergei will also join in the election with Helmut and Nils
29
Davies Corporation is a calendar-year taxpayer that is owned equally by Vivian, Rob, Danny, and Doug Davies. At the close of business on May 31, Rob Davies sells his 25% stock interest to Paula Bryan. Which of the following statements about the S election is correct?
A) Paula must consent to the S election, otherwise the election terminates at the close of business on May 31.
B) A new S election form must be filed by June 30 of the same year, with all shareholders consenting to the election. If a new S election is not filed, the election terminates on June 30 of that year.
C) Paula has 30 days to terminate the S election, otherwise the election remains in place for the entire year and all subsequent years.
D) None of the above statements are correct.
D) None of the above statements are correct.
30
```
The passive income test relating to an S corporation election is applied
A) daily.
B) monthly.
C) quarterly.
D) annually.
```
D) annually.
31
Identify which of the following statements is true.
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.
C) An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C E&P.
32
Which of the following conditions will not cause an S election to be terminated?
A) exceeding the 100-shareholder limit
B) creating a second class of stock having a dividend preference
C) selecting an improper tax year
D) failing to file a timely tax return
D) failing to file a timely tax return
33
```
On June 30 of the current year, the S election of Great Corporation is terminated, thus creating a six-month S short year and a six-month C short year. Great Corporation is a calendar-year taxpayer. The S short-year return is due
A) September 15.
B) December 15.
C) March 15 of the next year.
D) June 30 of the next year.
```
C) March 15 of the next year.
34
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
A) automatically terminate the election and Krause cannot reelect for a 5-year time period.
B) retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
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.
D) likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C E&P.
35
If an S corporation inadvertently terminates its election, the IRS
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.
A) may permit the corporation to report as an S corporation even for the period that includes the termination date.
36
Identify which of the following statements is false.
A) A C corporation short-year income tax liability must be determined on an annualized basis.
B) If the termination of an S election is considered to be inadvertent, then the election is permitted to continue in place as if the termination had never occurred.
C) If an S election is terminated and the termination is not considered to be inadvertent, a ten-tax-year waiting period is required before making a new election.
D) A corporation can obtain relief for a late S election if the IRS consents.
C) If an S election is terminated and the termination is not considered to be inadvertent, a ten-tax-year waiting period is required before making a new election.
37
```
April Corporation's Subchapter S election was voluntarily terminated for 2010. The first year that April would be eligible to reelect S corporation status is
A) 2012.
B) 2013.
C) 2014.
D) 2015.
```
D) 2015
38
Identify which of the following statements is true.
A) An S corporation should have a buy-sell agreement to guard itself against an ill-advised sale of its stock.
B) The terms "small business corporation" and "S corporation" are synonymous.
C) A regular corporation has common and preferred stock outstanding on January 1. On January 2, the preferred stock is canceled in a recapitalization, leaving only common stock outstanding. The corporation can make an S election for this tax year.
D) All of the above are false.
A) An S corporation should have a buy-sell agreement to guard itself against an ill-advised sale of its stock.
39
Garret and Hans own all the stock of GH Corporation. Garret sells all his GH stock to Olga on February 12. The next day, GH makes an S election. For the election to apply to the current year, who must consent to the election?
Olga, Garret, and Hans must consent to the election. If Olga refuses to consent to the election, the election will not begin until next year.
Olga, Garret, and Hans must consent to the election. If Olga refuses to consent to the election, the election will not begin until next year.
40
Swamp Corporation, a calendar-year taxpayer, has been an S corporation for several years. However, the corporation has become quite profitable, and management feels that it would be advantageous to make a public stock offering. What are Swamp Corporation's options concerning the date of revocation of the S election?
If Swamp revokes its S election before March 16 of the current year and has the election terminated at the close of business on December 31 of the previous year, the S election is retroactively revoked to January 1 of that year. If the revocation election is made after March 15 of the current year, it does not take effect until January 1 of next year. Swamp may also specify a prospective current- year revocation date as long as the date specified is on or after the date the revocation is made.
41
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?
Zinc can earn an unlimited amount of passive income during a tax year because it has never been taxed as a C corporation and has no Subchapter C E&P.
42
Bellows Corporation, a calendar-year taxpayer, has been an S corporation for ten years. Last year, John sold all the Bellows stock to Micky. Payments for the stock are to be made over a five-year period. In March of next year, Micky fails to make the necessary payments and John repossesses the stock. During the time Micky holds the stock, Bellows Corporation revokes its S election. Can Bellows Corporation reelect S status?
Yes, Bellows Corporation can immediately apply for reelection of S corporation status because more than 50% ownership change has occurred since the date of termination.
43
Woods Corporation has operated as a C corporation for the last seven years. The corporation has assets with a $500,000 adjusted basis and a $700,000 FMV. Liabilities are $200,000. Wolf Woods, a calendar-year taxpayer, owns all of the Woods Corporation stock. The corporation has a June 30 year-end and uses the accrual method of accounting. In order to reduce his total combined corporate and personal federal income tax liability, Wolf's CPA has told him to convert the corporation to S corporation status. Wolf would like to complete the conversion on the last day of the corporation's tax year. What tax issues should Wolf and his CPA consider with respect to the S election?
The questions listed below are based on the presumption that an S election is going to be advantageous and that the S corporation is in fact the best entity choice for the corporation.
* What procedures must be followed to make an S election?
* By what date must the corporation make the election?
* What format does the election take?
* What consents are required of the shareholders?
* What tax year should the S corporation elect? Does this tax year have to be the same tax year used by the C corporation?
* What accounting methods should the S corporation elect? Do these accounting methods have to be the same accounting methods used by the C corporation?
* What possible built-in gains tax liability will be incurred while an S corporation?
* Should the corporation obtain an appraisal of the assets as of the first day of the S election?
* What tax attributes (e.g., NOLs and capital losses) will be suspended as a result of making the S election?
* What possible excess net passive income tax liability will the S corporation incur?
* Should the corporation consider distributing its Subchapter C E&P to eliminate this tax liability?
* What possible LIFO recapture tax liability will the corporation incur in its final C corporation tax year?
The corporation must file an S election (Form 2553) in a timely manner, and the appropriate consents must be obtained from the shareholders. The S corporation cannot automatically use a tax year different from the C corporation, but it may have to change to a required tax year. The S corporation must continue to use the accounting methods the C corporation has used.
A built-in gains tax liability will be imposed on asset dispositions occurring within ten years of the first day of the S election period. An appraisal is suggested to establish the amount of the built-in gains and losses to minimize the built-in gains tax liability. C corporation NOLs and net capital losses can reduce the built-in gains tax liability but cannot pass through to the shareholders. In addition, if the S corporation has Subchapter C E&P, it may incur the excess net passive income tax liability if it earns a substantial amount of passive income. Also, the S corporation may incur the LIFO recapture tax if it used the LIFO inventory method in its final C corporation tax year.
44
Tax-exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the shareholders' gross income.
False
45
Identify which of the following statements is true.
A) The natural business year for fiscal-year election purposes is any tax year that ends within six months after the peak period of business.
B) Section 444 permits an S corporation to elect to use a fiscal year other than a permitted year.
C) A new corporation that is 100% owned by Johnny Blake, a cash method of accounting taxpayer, makes an S election for its initial tax year. The S corporation must also elect to use the cash method of accounting as its overall accounting method.
D) All of the above are false.
B) Section 444 permits an S corporation to elect to use a fiscal year other than a permitted year.
46
```
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
A) one month.
B) two months.
C) three months.
D) six months.
```
C) three months.
47
When a Sec. 444 fiscal-year election is made, the S corporation makes required payments to the IRS in order to continue to use the fiscal year as its tax year. Which of the following statements about the tax year is correct?
A) The Sec. 444 payment is deductible by the S corporation as an income tax.
B) The Sec. 444 payment is allocated ratably to each shareholder and claimed as a tax payment on their own tax return(s).
C) The Sec. 444 payments are refundable if the S election is terminated.
D) The Sec. 444 payments must be made quarterly on the same dates that the S corporation's estimated tax payments are otherwise due.
C) The Sec. 444 payments are refundable if the S election is terminated.
48
```
An S corporation is permitted to claim
A) the dividends-received deduction.
B) a personal exemption.
C) a deduction based on the amortization of organizational expenditures.
D) a net operating loss.
```
C) a deduction based on the amortization of organizational expenditures.
49
```
Which of the following items is not separately stated for an S corporation?
A) short-term capital gain
B) dividend income
C) Section 1245 income
D) charitable contribution
```
C) Section 1245 income
50
Identify which of the following statements is true.
A) An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders.
B) The S corporation's separately stated items are in general the same ones that apply in partnership taxation.
C) An S corporation cannot claim a dividends-received deduction.
D) All of the above are true.
D) All of the above are true.
51
Identify which of the following statements is true.
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.
All of the above are false.
52
Identify which of the following statements is true.
A) Beach Corporation, an S corporation, has gross receipts of $240,000; taxable income of $120,000; passive investment income of $100,000; and expenses directly attributable to the passive investment income of $20,000. The corporation's excess net passive income is $32,000.
B) The built-in gains tax applicable to S corporations can be avoided if the property is held for ten years.
C) An S corporation generally will not owe the built-in gains tax if the corporation has never been a C corporation.
D) All of the above are true.
D) All of the above are true.
53
```
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?
A) none
B) 80% of gross receipts
C) 50% of gross receipts
D) no limit
```
D) no limit
54
```
The recognition period for the built-in gains tax extends for how many years after the S election takes effect?
A) one year
B) three years
C) five years
D) ten years
```
D) ten years
55
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?
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.
A) collection of accounts receivable in the current year that resulted from services performed last year
56
Connie's Restaurant has been an S corporation since it was formed in 2006. Its results for the previous year are as follows:
```
Sales $200,000
Supplies 90,000
Salaries 50,000
Depreciation 5,000
Interest on business loan 1,000
Charitable contributions 3,000
Advertising 4,000
Utilities expense 6,000
Property taxes 1,000
Gain on the sale of
investment land (long-term) 8,000
```
What are Connie's separately stated items? What is the S corporation's ordinary income?
The separately stated items, other than ordinary income, are the long-term capital gain of $8,000 and the charitable contributions. The S corporation ordinary income is calculated as follows:
```
Sales ($200,000)
Supplies 90,000
Salaries (employees) 50,000
Depreciation 5,000
Interest on business loan 1,000
Advertising 4,000
Utilities expense 6,000
Property taxes 1,000 (157,000)
Ordinary income $43,000
```
57
Power Corporation reports the following results:
```
Service income (not passive income) $40,000
Dividend income 30,000
Interest income 60,000
Passive income-related expenses 20,000
Other expenses 50,000
```
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?
The excess net passive income is:
{[$30,000 + $60,000 - $20,000] × [$90,000 - (0.25 × $130,000)]/$90,000} = $44,722.
The excess net passive income tax is: $44,722 × 0.35 = $15,653.
58
Chuck Corporation reports the following results for this year:
```
Service (nonpassive) income $17,500
Dividend income 18,500
Interest income 14,000
Passive income-related expenses 5,000
Other expenses 12,500
```
At the end of this year, Chuck's E&P for its C corporation tax years amount to $30,000. Compute Chuck Corporation's excess net passive income.
$16,913
Excess net passive income= Net passive income * (Passive investment income - 25% of gross receipts/ Passive investment Income)
($32,500-$5,000) * (32,500 - 25%($50,000)/$32,500)
59
Potter Corporation reports the following results for the current year:
```
Operating income $40,000
Dividend income 35,000
Interest income 25,000
Other expenses 25,000
Passive income-related expenses 20,000
```
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?
```
$35,000 Dividends
25,000 Interest
$60,000 Gross passive income
( 20,000) Minus: related expenses
$40,000 Net passive income
```
23,333
60
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?
$110,000 × 0.35 = $38,500
61
What is a permitted year?
A permitted year is defined as a taxable year ending on December 31 (including a 52-53 week year) or any fiscal year for which the corporation established a business purpose.
62
Can loss or credit carryforwards from a previous C corporation tax year help reduce the built-in gains tax?
Yes. Both NOL and capital loss carryforwards reduce the amount of recognized built-in gains taxed under Sec. 1374. The general business and minimum tax credit carryforwards reduce the actual built-in gains.
63
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.
True
64
S shareholders cannot increase the basis of their stock by a ratable share of the general S corporation liabilities.
True
65
Identify which of the following statements is true.
A) Long-term capital gains may be subject to double taxation if the gains are subject to both the excess net passive income tax rules and the built-in gains tax rules.
B) Special allocations of ordinary income or loss and separately stated items that are available for partnerships are also permitted with S corporations.
C) When an S corporation's shares are sold by a shareholder during a tax year, the transferee's share of the earnings is reported from the day after the transfer date through the end of the tax year.
D) All of the above are false.
C) When an S corporation's shares are sold by a shareholder during a tax year, the transferee's share of the earnings is reported from the day after the transfer date through the end of the tax year.
66
```
Train Corporation is an S corporation that is owned equally by Carlos and Diane at the beginning of the year. On April 21 (the 111th day of Train's tax year) of the current year, Carlos sells all of his Train Corporation stock to Andre. How many days will be used when computing Carlos's share of S corporation income for this year (a non-leap year), assuming that a special income allocation election is not made?
A) 110
B) 111
C) 254
D) 255
```
B) 111
67
```
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?
A) $0
B) $50,000
C) $100,000
D) $200,000
```
C) $100,000
68
```
Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2011. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2011, but had $200,000 of ordinary income. In 2012, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2012?
A) $0
B) $50,000
C) $100,000
D) $200,000
```
B) $50,000
69
```
Which one of the following special loss limitations apply to an S corporation?
A) at-risk rules
B) passive activity limitation rules
C) hobby loss rules
D) All of the above apply.
```
D) All of the above apply.
70
```
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
A) December 31 of this year.
B) March 15 of next year.
C) October 31 of next year.
D) December 31 of next year.
```
C) October 31 of next year.
71
Identify which of the following statements is false.
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.
B) A shareholder's S corporation stock basis will increase when the shareholder acts as guarantor on a corporate indebtedness.
72
```
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?
A) $140,000
B) $100,000
C) $50,000
D) $40,000
```
A) $140,000
73
Gofer Corporation, an S corporation, is owned equally by Mahmoud and Kwame. The corporation had long-term capital gains of $100,000 and ordinary income of $90,000 for the current year and made no distributions. What is the amount of ordinary income from S corporation activities that Mahmoud must report?
$90,000 × 0.50 = $45,000
74
For the calendar year, Elk Corporation, an S corporation, has book income of $55,000, which includes $45,000 from operations and a $10,000 net long-term capital gain. During the year, $22,500 is distributed to Elk's three equal shareholders, all of whom are calendar-year taxpayers. What are Elk's total ordinary income and capital gain pass-throughs for the year?
Ordinary income is $45,000 and long-term capital gain income is $10,000.
75
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?
Ordinary income, $6,400 (0.10 × $64,000).
Short-term capital gain, $1,600 (0.10 × $16,000).
The distribution does not result in any income or gain being recognized since it does not exceed any shareholder's basis for their stock.
76
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)?
He must report $5,000 ordinary income and $4,000 ordinary loss.
77
If losses are suspended due to the lack of basis in S corporation stock, do the losses expire when the S election terminates?
No. These loss carryovers may be deducted in the post-termination transition period if the shareholder creates additional stock basis in that period of time.
78
Troy owns 50% of Dot.Com, an e-commerce company. His S corporation stock basis at the beginning of the year is $300,000. Dot.Com has not done well this year and will report an ordinary loss of $875,000. Troy's marginal tax rate for the current year is 35%. What tax issues should Troy consider with respect to the loss?
What is Troy's allocable share of the Dot.Com ordinary loss?
* What portion of the loss is limited by the basis of the S corporation stock and debt? The at-risk rules? The passive activity loss rules? The hobby loss rules?
* If his use of the loss is limited only by the basis of the S corporation stock and debt, should Troy invest additional amounts before year-end to increase the basis of the stock and/or debt? When should such an investment be made? Before year-end? After year-end? Should he not make an additional investment and use the loss against future profits?
Troy should anticipate a $437,500 ordinary loss pass-through, which exceeds his $300,000 basis for the Dot.Com stock. The additional investment should be made only if it is economically wise. Even if Troy makes the additional investment, he still might not be able to deduct the loss. The passive activity loss rules may deny the loss until Troy has passive income from this or another activity or until he completely disposes of his investment. The tax year to make the additional investment, and deduct the loss, will be the year in which Troy anticipates the highest marginal tax rate (discounted for the time value of money.)
79
Cook's Outlet has been an S corporation since its inception six years ago. On January 1 of the current year, the corporation's two equal shareholders, Davis and Dane, had adjusted bases of $150,000 and $175,000, respectively, for their S corporation's stock. The shareholders plan to have the corporation distribute land with a $50,000 adjusted basis and a $200,000 FMV in the current year. Ordinary income is expected to be $180,000 in the current year. What tax issues should Davis and Dane consider with respect to the distribution?
* What gain or loss does Cook's Outlet recognize on making the distribution? Does the gain or loss trigger any built-in gains tax liability? Excess net passive income tax liability?
* What is each shareholder's basis for the Cook's Outlet stock immediately preceding the distribution?
* What basis reduction does the distribution cause for each shareholder? Does the basis reduction trigger the recognition of any income by the shareholder (e.g., if the distribution reduces the shareholder's basis to zero)?
* What is each shareholder's basis for the Cook's Outlet stock immediately following the distribution?
* What is each shareholder's basis and holding period for the land received?
Cook's Outlet will recognize a $150,000 ($200,000 - $50,000) gain on the distribution. This gain may be subject to the Sec. 1374 or Sec. 1375 tax, but insufficient facts are provided to make such a determination. This gain and Cook's Outlet's ordinary income from operations will flow through to the shareholders and increase their stock bases. Davis and Dane take $315,000 ($150,000 + $75,000 + $90,000) and $340,000 ($175,000 + $75,000 + $90,000) bases, respectively, assuming no corporate-level taxes are imposed. Each shareholder will reduce his basis by $100,000 (0.50 × $200,000) for the distribution.
80
```
Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2009. Tex and Shirley each own 50% of the stock and have a basis in their stock of $50,000 on January 1, 2009. Cactus does not make any distributions during 2009, but had $200,000 of ordinary income. In 2010, ordinary income was $100,000 and distributions were $100,000. What is Tex's basis at January 1, 2011?
A) $100,000
B) $150,000
C) $200,000
D) $250,000
```
B) $150,000
81
Identify which of the following statements is true.
A) The overall S corporation loss limitation equals the shareholder's adjusted basis for his/her S corporation stock plus his/her ratable share of all S corporation liabilities.
B) The loss pass-throughs from an S corporation may produce a net operating loss for the shareholder.
C) An S corporation shareholder can increase the adjusted basis of his/her stock by any indebtedness owed the shareholder by the S corporation.
D) All of the above are false.
B) The loss pass-throughs from an S corporation may produce a net operating loss for the shareholder.
82
```
An electing S corporation has a $30,000 ordinary loss for the nonleap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her one-half of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Beverly?
A) $25,000
B) $15,000
C) $6,000
D) $5,959
```
C) $6,000
83
```
An electing S corporation has a $30,000 ordinary loss for the non-leap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her one-half of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Sonya?
A) $25,000
B) $15,000
C) $10,000
D) $6,000
```
B) $15,000
Explanation: $30,000 × 0.50 = $15,000
84
Eagle Corporation has always been an S corporation. Eagle is 100% owned by Katy. Katy's adjusted basis in the Eagle stock is $100,000 on January 1 of the current year. During the current year, Eagle distributes XYZ stock (a capital asset) to Katy. The XYZ stock has a $50,000 FMV and a $40,000 adjusted basis on Eagle's books. The XYZ stock has been held as an investment for four years by Eagle. Eagle Corporation reports $40,000 of ordinary income in the current year. What is Katy's basis in the Eagle stock at the beginning of the next year?
```
1/1 Basis $100,000
Plus: gain on distribution 10,000
ordinary income 40,000
Predistribution basis $150,000
Minus: distribution ( 50,000)
12/31 Basis $100,000
```
85
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.
True
86
Identify which of the following statements is false.
A) The AAA balance can be negative, but the shareholder's basis in the S corporation stock cannot be less than zero.
B) The AAA represents the cumulative income/loss recognized in post-1982 S corporation years.
C) Nonmoney property distributions made by an S corporation having accumulated E&P are treated differently when determining the corporate-level gain recognized under Sec. 311 than are property distributions made by an S corporation without accumulated E&P.
D) Tax-exempt income does not increase the AAA but increases the basis of the S corporation stock.
C) Nonmoney property distributions made by an S corporation having accumulated E&P are treated differently when determining the corporate-level gain recognized under Sec. 311 than are property distributions made by an S corporation without accumulated E&P.
87
```
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?
A) AAA; E&P
B) AAA; OAA; E&P
C) E&P; AAA
D) AAA; PTI; E&P
```
A) AAA; E&P
The OAA is not a separate accumulated earnings account even though it is reported on page 4 of the Form 1120S. The tax-exempt income otherwise included in OAA becomes part of the S corporation's stock basis for distribution purposes.
88
Dixon Corporation was incorporated on January 1, 2005. The corporation made its S election on April 1, 2008. The corporation retains an E&P balance from its C corporation days. Which one of the following current-year income and expense items is not included in Dixon Corporation's Accumulated Adjustments Account?
A) ordinary income or loss
B) tax-exempt bond interest income
C) long-term capital gains and losses
D) amortization of organizational expenditures
B) tax-exempt bond interest income
89
Rocky Corporation, an S corporation, reports the following results for the current year:
```
Ordinary income $70,000
Long-term capital gain 20,000
Municipal bond interest income 10,000
Domestic corporate dividends 6,000
Charitable contributions 16,000
```
Rocky's AAA and accumulated E&P balances at the beginning of the year are $80,000 and $50,000, respectively. Rocky makes a $100,000 cash distribution to its sole shareholder on June 1 and a second $100,000 cash distribution on December 1. The shareholder's basis for Rocky stock on January 1 was $120,000. Discuss the tax consequences of these transactions.
The basis of the shareholder's stock is increased to $210,000 ($120,000 + $70,000 + $20,000 + $10,000 + $6,000 - $16,000) by Rocky's current year operations.
Rocky's AAA balance before any current year distributions is $160,000 ($80,000 + $70,000 + $20,000 + $6,000 - $16,000). $80,000 {[$100,000/($100,000 + $100,000)] × $160,000 = $80,000} of each distribution comes from Rocky's AAA and is tax-free because the $160,000 amount coming from AAA is less than the $210,000 basis of the Rocky stock.
The remaining $20,000 of each distribution comes from Rocky's accumulated E&P and is a taxable dividend. This portion of the distribution does not reduce the basis of the stock. The year-end accumulated E&P is $10,000.
In addition, Rocky has a $10,000 balance in its Other Adjustments Account from the current year tax-exempt income. This amount is not a separate earnings pool for distribution purposes, but is reflected in the shareholder's stock basis.
The basis of the Rocky stock is $50,000 at year-end ($210,000 - $160,000).
90
Zebra Corporation has always been an S corporation and is 100% owned by Paul. Paul has a basis of $40,000 in his Zebra stock at the beginning of the year. During the year, Zebra has an ordinary loss of $20,000 and a long-term capital gain of $10,000. In addition, Zebra Corporation distributed $55,000 in cash to Paul on December 1. Will the distribution cause Paul to recognize a gain? If so, what are its amount and character?
Basis adjustments for distributions made by an S corporation during the tax year are taken into account before applying the loss limitation. Distributions reduce the adjusted basis for determining the allowable loss, but the loss does not reduce the adjusted basis for determining the tax status of distributions.
Basis $40,000
Long-term capital gain 10,000
Minus: distribution (50,000)*
Postdistribution basis $ 0
*Distributions cannot reduce basis below zero. The $5,000 excess distribution is a long-term capital gain.
91
Caravan Corporation has always been an S corporation. Caravan Corporation is 100%owned by Alan Merten. On January 1, Alan has an adjusted basis of $50,000 in his Caravan stock. During the year, Caravan reports ordinary income of $60,000, a long-term capital gain of $10,000, and a charitable contribution of $5,000. Alan receives a $20,000 cash distribution from Caravan on December 1. What income does Alan recognize from the distribution, and what is his basis in the Caravan stock at year-end?
Basis = $50,000 + $60,000 + $10,000 - $5,000 - $20,000 = $95,000. The distribution is tax-free since the $115,000 predistribution basis exceeds the amount distributed.
92
Identify which of the following statements is true.
A) An S corporation may be subject to the corporate alternative minimum tax.
B) Allocation of tax preference items for AMT generally occurs on a daily basis.
C) An S corporation may be subject to the corporate alternative minimum tax when the corporation has accumulated E&P from prior C corporation tax years.
D) All of the above are false.
B) Allocation of tax preference items for AMT generally occurs on a daily basis.
93
Identify which of the following statements is true.
A) Fringe benefits limited by the more-than-2%-shareholder rule include stock options, group term life insurance premiums, and medical insurance premiums.
B) A shareholder owning 2% or more of an S corporation's stock, who is also an employee of the corporation, must include all statutory fringe benefits in gross income on his/her individual return.
C) Section 318 stock attribution rules are used to define 2% or more shareholders of S corporation's stock.
D) All of the above are false.
B) A shareholder owning 2% or more of an S corporation's stock, who is also an employee of the corporation, must include all statutory fringe benefits in gross income on his/her individual return.
94
```
An S corporation is not treated as a corporate taxpayer with respect to which one of the following fringe benefits?
A) stock options
B) qualified retirement plans
C) group term life insurance premiums
D) nonqualified deferred compensation
```
C) group term life insurance premiums
95
Identify which of the following statements is false.
A) The election form can be signed by a person authorized to sign the S corporation tax return.
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 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.
96
Identify which of the following statements is false.
A) An S corporation files a Form 1120S corporate income tax return on or before the 15th day of the fourth month following the close of its tax year.
B) An S corporation's ordinary income or loss is reported by an individual shareholder on Schedule E of Form 1040.
C) An S corporation that owes the built-in gains tax or the excess net passive income tax must make quarterly estimated tax payments.
D) An S corporation cannot use the prior-year tax liability exception when determining the required payment to be made with respect to the built-in gains tax.
A) An S corporation files a Form 1120S corporate income tax return on or before the 15th day of the fourth month following the close of its tax year.
97
```
Mashburn Corporation is an S corporation that uses a fiscal year ending June 30 as its tax year. When is Mashburn Corporation's income tax return due?
A) July 15
B) September 15
C) October 15
D) March 15 of the next year
```
B) September 15
98
```
An S corporation is permitted an automatic extension of time for filing its tax return. The automatic extension period is
A) one month.
B) two months.
C) three months.
D) six months.
```
D) six months
99
```
Which of the following tax levies imposed on an S corporation are required to be paid by using estimated tax payments?
A) built-in gains tax
B) excess net passive income tax
C) both A and B
D) none of the above
```
C) both A and B
built-in gains tax
excess net passive income tax
