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Exam 17: S: Corporations

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Question 41

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Which of the following statements is correct regarding S corporation estimated taxes?

A) S corporations never pay estimated taxes.
B) S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes.
C) S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes.
D) S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes.
E) None of these.

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

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Question 42

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Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $45,000. For 2017, 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 2017?

A) $40,000.
B) $30,000.
C) $20,000.
D) $5,000.
E) None of these.

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

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Question 43

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MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2016. The following assets were owned by MWC on December 31, 2015. $\begin{array} { | l | r | } \hline \text { Description } & \text { Amount } \\\hline \text { Consulting revenue } & \$ 99,000 \\\hline \text { Salary to owners } & ( 40,000 ) \\\hline \text { Employee wages } & ( 30,000 ) \\\hline \text { Depreciation expense } & ( 5,000 ) \\\hline \text { Municipal bond interest } & 6,000 \\\hline \text { Interest income } & 42,000 \\\hline \text { Dividend income } & 25,000 \\\hline \text { Overall net income } & \$ 97,000 \\\hline\end{array}$ What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2016?

Assume that at the end of 2016, Clampett, Inc. (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, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

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?

Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2016, Bryant sold his CB shares to Don. CB reported business income for 2016 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline \text { Period } & \text { Income } \\\hline \text { January } 1 \text { through September } 30 ( 273 \text { days) } & \$ 200,000 \\\hline \text { October } 1 \text { through December } 31 \text { ( } 92 \text { days) } & 530,000 \\\hline \text { January } 1 \text { through December } 31 & \$ 730,000 \\\hline\end{array}$ How much 2016 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?

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

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.

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

Suppose at the beginning of 2016, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2016, 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?

Suppose at the beginning of 2016, 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 2016, 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?

Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $45,000. For 2017, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2017?

S corporations are required to recognize both gains and losses on non-liquidating distributions of property to shareholders.

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2016, 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 2016 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline \text { Period } & \text { Income } \\\hline \text { January 1 through April } 30 \text { (120 days) } & \$ 200,000 \\\hline \text { May 1 through December } 31 ( 245 \text { days) } & \underline { 530,000 } \\\hline \text { January 1 through December } 31 & \$ 730,000 \\\hline\end{array}$ 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?

Jackson is the sole owner of JJJ corp. (an S corporation). At the end of 2016, Jackson's basis in his JJJ stock and his at risk amount was $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, 2016. If Jackson contributes $6,000 cash to JJJ on July 1, 2017 and $3,000 cash on January 5, 2018, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

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

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

When an S corporation distributes appreciated property to its shareholders the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

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, Inc. (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 Cook, Inc. after formation?