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Exam 16: S Corporations

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Question 31

True/False

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

A) True
B) False

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Question 32

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Suppose at the beginning of 2018,Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000.During 2018,the S corporation reported an $80,000 ordinary business loss and no separately stated items.How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

A) $10,000.
B) $27,000.
C) $37,000.
D) $40,000.
E) None of the choices are correct.

F) D) and E)
G) C) and E)

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Question 33

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Suppose Clampett,Inc.terminated its S election on August 28,2018.At the end of the S corporation's short tax year ending on August 28,J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis) ,and he had a suspended loss of $20,000.In 2019,J.D.made additional capital contributions of $5,000 on March 15 and $12,000 on September 5.How much loss may J.D.deduct in 2019?

Clampett,Inc.has been an S corporation since its inception.On July 15,2019,Clampett,Inc.distributed $50,000 to J.D.His basis in his Clampett,Inc.stock on January 1,2019,was $30,000.For 2019,J.D.was allocated $10,000 of ordinary income from Clampett,Inc.and no separately stated items.What is J.D.'s basis in his Clampett,Inc.stock after all transactions in 2019?

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

J.D.formed Clampett,Inc.as a C corporation (calendar tax year) with J.D.,Granny,and Jethro,Inc.(a C corporation) as shareholders.On January 15,2018,Jethro,Inc.sold all its shares to Jane Hathaway.On February 28,2018,Clampett,Inc.filed an S corporation election,with J.D.,Granny,and Jane all consenting to the election.What is the earliest effective date of the S election? 

At the beginning of the year,Clampett,Inc.had $100,000 in its AAA,$60,000 of earnings and profits from prior C corporation years.During the year,Clampett,Inc.earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders.Assume that J.D.owns 25% of Clampett,Inc.,his basis in Clampett,Inc.at the beginning of the year is $10,000,and his share of the distribution was $50,000.How much income does J.D.recognize this year from these transactions?

Maria resides in San Antonio,Texas.She formed MZE Corporation under the state laws of Texas.Maria anticipates that she will conduct her business activities in both Mexico and the United States.Is MZE eligible to elect S corporation status? Explain.

Which of the following is not a true statement?

Hector formed H Corporation as a C corporation at the beginning of 2018.Hector was the sole shareholder of H Corporation.H Corp.reported 2018 taxable income (and earnings and profits)of $200,000.At the beginning of 2019,H Corp.elected S corporation status.During 2019,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 2019?

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 2018,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?

Clampett,Inc.converted to an S corporation on January 1,2018.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) .In 2019,Clampett,Inc.sells its entire inventory for $60,000 (Basis $30,000) .Assume the corporate tax rate is 21% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2019 if it had been a C corporation.In 2020,Clampett,Inc.'s taxable income would have been $100,000 if it had been a C corporation.How much built-in gains tax does Clampett,Inc.pay in 2019? In 2020?

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

Distributions to owners may not cause the AAA to go negative or to become more negative.

If Annie and Andy (each a 30% shareholder in a calendar year S corporation) file a revocation statement on March 20,2018 to terminate their S corporation's S election,what is the effective date of the S corporation termination (assuming they do not specify one) ?

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

Suppose at the beginning of 2018,Jamaal's basis in his S corporation stock is $1,000,and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.In 2018,Jamaal's share of S corporation income is $4,000,and he received a $7,000 distribution from the S corporation.What is Jamaal's stock and debt basis after these transactions?

ABC was formed as a calendar-year S corporation with Alan,Brenda and Conner as equal shareholders.On May 1,2018,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 2018 as follows (assume that there are 365 days in the year): $\begin{array} { l l } \text { Period } & \text { Income } \\\text { Jaruary } 1 \text { through April } 30 ( 120 \text { days } ) & \$ 200,000 \\\text { May } 1 \text { through Decernber } 31 ( 245 \text { days) } & \underline {530,000} \\ \text { Jaruary } 1 \text { through Decernber } 31 &\underline { \$ 730,000}\end{array}$ If ABC uses the daily method of allocating income between the S corporation short tax year (January 1 - April 30)and the C corporation short tax year (May 1 − December 31),how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2018? 

Assume that at the end of 2018,Clampett,Inc.(an S corporation) distributes long-term capital gain property (fair market value of $40,000,basis of $25,000) 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 $15,000 in his Clampett,Inc.stock.How much income does J.D.recognize as a result of the distribution?

Clampett,Inc.(an S corporation) previously operated as a C corporation.Under general rules,distributions from Clampett,Inc.are deemed to be paid in the following order: