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Exam 11: S Corporations

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Question 21

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

A) Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account.
B) Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit.
C) Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis.
D) The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis.
E) None of the choices are correct.

F) A) and C)
G) C) and E)

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Question 22

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During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

A) True
B) False

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Question 23

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Suppose a calendar-year C corporation, NewCorp, Incorporated, was formed on January 1, 2020, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Incorporated, a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2020 When is the S election effective?

Supposethat at the beginning of 2020 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 he has a $5,000 suspended loss from the S corporation. In 2020, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2020?

Supposethat 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. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50percent shareholder of the S corporation?

Which of the following S corporations would be subject to the excess net passive income tax?

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?

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

Suppose that at the beginning of 2020 Jamaal's basis in his S corporation stock was $28,000 and Jamaal has directly loaned the S corporation $9,990. During 2020, the S corporation reported an $80,100 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50percent of the S corporation?

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

Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Incorporated, stock. What is J.D.'s stock basis after the distribution?

In 2021, 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.

Clampett, Incorporated, converted to an S corporation on January 1, 2020. At that time, Clampett, Incorporated, had cash ($54,000) , inventory (FMV $74,000, basis $37,000) , accounts receivable (FMV $54,000, basis $54,000) , and equipment (FMV $74,000, basis $94,000) . In 2021, Clampett, Incorporated, sells its entire inventory for $74,000 (basis $37,000) . Assume the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income in 2021 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2021?

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 $10,000, and his share of the distribution was $50,000. How muchtotal income does J.D. recognize this year from these transactions?

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 $20,000. In 2021, 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 2021?

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

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?

Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

Which of the following would not result in an S election termination?

When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain.