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Exam 11: S Corporations

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Question 1

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If Annie and Andy (each a 30percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2020, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

A) January 1, 2020
B) February 10, 2020
C) January 1, 2021
D) February 10, 2021
E) None of the choices are correct.

F) A) and C)
G) B) and D)

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Question 2

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Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

A) Brother
B) Great-grandparent
C) Grandchild
D) Grandparent
E) None of the choices are correct.

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

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Question 3

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Suppose that at the beginning of 2020 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2020, 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 percent of the S corporation?

Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

The same exact requirements for forming and contributing property govern S corporations and partnerships.

Clampett, Incorporated, converted to an S corporation on January 1, 2020. At that time, Clampett, Incorporated, 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 2021, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000) . Assume the corporate tax rate is 21 percent and that Clampett Incorporated's taxable income would have been a $50,000 loss in 2021 if it had been a C corporation. In 2022, Clampett, Incorporated's taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2021? In 2022?

Jackson is the sole owner of JJJ Corporation (an S corporation). At the end of 2020, Jackson's basis in his JJJ stock and his at-risk amount were $0. Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax-basis and at-risk level). JJJ's S election was terminated effective the end of the day on December 31, 2020. If Jackson contributes $6,000 cash to JJJ on July 1, 2021, and $3,000 cash on January 5, 2022, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2020, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated ABC reported business income for 2020 as follows: (Assume that there are 365 days in the year.) If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2020, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated ABC reported business income for 2020 as follows: (Assume that there are 365 days in the year.) 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 2020?

During 2020, CDE Corporation (an S corporation since its inception in 2018) liquidates 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 $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

For an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.

AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders, Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Incorporated (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Incorporated, stock after formation?

Suppose Clampett, Incorporated, terminated its S election on August 28, 2020. 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 $20,750. In 2021, J.D. made additional capital contributions of $5,750 on March 15 and $14,250 on September 20. How much loss may J.D. deduct in 2021?

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

Supposethat at the beginning of 2020 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 2020, 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?

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined stock and debt basis of the shareholder.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60percent shareholder and Bryant is a 40percent shareholder. On September 30, 2020, Bryant sold his CB shares to Don. CB reported business income for 2020 as follows: (Assume that there are 365 days in the year.) How much 2020 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Incorporated, stock after these transactions?