Deck 22: S Corporations

Question 1

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Answer 1

True

Question 2

To make an S election effective as of the beginning of the current year, an S corporationmust file IRS Form 2553 within 3½ months after the beginning of the year.

Answer 2

False

Question 3

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

Answer 3

False

Question 4

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Question 5

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Question 6

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

Question 7

The S corporation rules are less complex for S corporations that have earnings andprofits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

Question 8

Differences in voting powers are permissible across shares of S corporation stock as longas the shares have identical distribution and liquidation rights.

Question 9

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

Question 10

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

Question 11

An S corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year end.

Question 12

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Question 13

An S corporation election may be voluntarily or involuntarily terminated.

Question 14

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Question 15

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. but Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.

Question 16

Corporations taxed as S corporations offer the same legal protection to owners ascorporations taxed as C corporations.

Question 17

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

Question 18

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

Question 19

S corporations may have no more than 50 shareholders, but members of the same familyonly count as one shareholder.

Question 20

Publicly traded corporations cannot be treated as S corporations.

Question 21

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

Question 22

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is very similar to the rules for partnerships.

Question 23

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the Net Investment Income tax.

Question 24

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

Question 25

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

Question 26

Like partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

Question 27

An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

Question 28

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.

Question 29

S corporation allocated losses to a shareholder not deductible due to the tax basis limitation rules are carried over by the shareholder to future years for potential utilization.

Question 30

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

Question 31

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30year-end as an S corporation.

Question 32

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Question 33

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

Question 34

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

Question 35

Unlike partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

Question 36

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is very similar to the rules for partnerships.

Question 37

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

Question 38

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

Question 39

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

Question 40

S corporations are not entitled to a dividends received deduction.

Question 41

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

Question 42

S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

Question 43

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

Question 44

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

Question 45

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, 2017, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2017, 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?

A) January 1, 2017.
B) January 1, 2019.
C) February 28, 2018.
D) January 1, 2018.
E) Never.

Question 46

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

Question 47

Suppose a calendar year C corporation, NewCorp., Inc., was formed on January 1, 2017 and all of the shareholders filed a form 2553 to elect S corporation status on April 14,2017 with the consent of all of NewCorp. Inc.'s shareholders: Hassell, RichieCunningham, and Arnold's, Inc. (a C corporation). When is the S election effective?

A) April 14, 2018.
B) January 1, 2018.
C) January 1, 2017.
D) April 14, 2017.
E) Never.

Question 48

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

A) grandparent.
B) grandchildren.
C) brother.
D) great-grandparent.
E) None of the choices are correct.

Question 49

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

Question 50

Which of the following is a requirement to be an S corporation?

A) have only one class of stock.
B) have at least one corporate shareholder.
C) be a domestic or foreign corporation.
D) have fewer than 75 shareholders.
E) None of the choices are correct.

Question 51

The estimated tax payment rules for S corporations generally follow the rules for Ccorporations.

Question 52

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and 2 closefriends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?

A) 90.
B) 95.
C) 97.
D) 92.
E) None of the choices are correct.

Question 53

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

A) Having 120 unrelated shareholders.
B) Having excess passive investment income for two consecutive years.
C) Issuing a second class of stock.
D) Having a C corporation as a shareholder.
E) None of the choices are correct.

Question 54

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

Question 55

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

Question 56

If Annie and Andy (each a 30% shareholder in an calendar year S corporation) file a revocation statement on March 20, 2017 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, 2017.
B) March 16, 2018.
C) March 18, 2017.
D) January 1, 2018.
E) None of the choices are correct.

Question 57

The built-in gains tax does not apply to S corporations that never operated as Ccorporations.

Question 58

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the fifteenth day of the fourth month after the S corporation's year end.

Question 59

If Annie and Andy (each a 30% shareholder in an calendar year S corporation) file a revocation statement on February 10, 2017 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) February 10, 2017.
B) January 1, 2018.
C) February 10, 2018.
D) January 1, 2017.
E) None of the choices are correct.

Question 60

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

A) U.S. citizens.
B) C Corporations.
C) 51 unrelated individuals.
D) Foreign citizens that are U.S. residents.
E) None of the choices are correct.

Question 61

Suppose Clampett, Inc. terminated its S election on August 28, 2017. 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. In2018, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 onSeptember 5. How much loss may J. D. deduct in 2018?

A) $0.
B) $5,000.
C) $20,000.
D) $17,000.
E) None of the choices are correct.

Question 62

Suppose at the beginning of 2017, 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 Scorporation. In 2017, 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?

A) $0 stock basis; $10,000 debt basis.
B) $0 stock basis; $8,000 debt basis.
C) $5,000 stock basis; $3,000 debt basis.
D) $5,000 stock basis; $10,000 debt basis.
E) None of the choices are correct.

Question 63

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:

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

Question 64

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock is $0, he hasa $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2017, Jamaal contributed $8,000 to the Scorporation, and the S corporation had ordinary income of $4,000. Assume that Jamaalowns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

A) $1,000 loss.
B) $4,000 income.
C) $3,400 loss.
D) $1,600 income.
E) None of the choices are correct.

Question 65

Suppose at the beginning of 2017, 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 Scorporation. In 2017, Jamaal's share of S corporation income is $4,000, and he received a$7,000 distribution from the S corporation. How much income does Jamaal report in2017 from these transactions?

A) $7,000.
B) $0.
C) $6,000.
D) $4,000.
E) None of the choices are correct.

Question 66

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2017, 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 50% shareholder of the S corporation?

A) $67,000 stock basis; $10,000 debt basis.
B) -$13,000 stock basis; $10,000 debt basis.
C) $27,000 stock basis; 10,000 debt basis.
D) $0 stock basis; $10,000 debt basis.
E) None of the choices are correct.

Question 67

On March 15, 2017, J. D. sold his Clampett, Inc. (an S corporation) shares to Ellie Mae, Inc. (a C corporation), terminating Clampett, Inc.'s S election on March 15, 2017. Absent permission from the IRS, what is the earliest date Clampett, Inc. may again elect to betaxed as an S corporation?

A) January 1, 2021.
B) January 1, 2020.
C) January 1, 2023.
D) January 1, 2022.
E) January 1, 2018.

Question 68

Clampett, Inc. has been an S corporation since its inception. On July 15, 2018, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2018, was $30,000. For 2018, 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. recognizesrelated to Clampett, Inc. in 2018?

A) $10,000.
B) $50,000.
C) $60,000.
D) $20,000.
E) None of the choices are correct.

Question 69

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock is $0, he hasa $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2017, Jamaal contributed $8,000 to the Scorporation, and the S corporation had ordinary income of $4,000. Assume that Jamaalowns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of2017?

A) $9,600 stock basis; $0 debt basis.
B) $0 stock basis; $9,600 debt basis.
C) $4,600 stock basis; $0 debt basis.
D) $0 stock basis; $4,600 debt basis.
E) None of the choices are correct.

Question 70

Assume Joe Harry sells his 25% interest in Joe's S Corp., Inc. to Tyrone on January 29.Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp., Inc. earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $200,000.
B) $29,000.
C) $112,000.
D) $50,000.
E) None of the choices are correct.

Question 71

Suppose Clampett, Inc. terminated its S election on August 28, 2017. 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. In2018, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 onSeptember 20. How much loss may J. D. deduct in 2018?

A) $0.
B) $5,000.
C) $20,000.
D) $17,000.
E) None of the choices are correct.

Question 72

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

A) Passive income.
B) Dividends.
C) Short-term capital gains.
D) Investment interest income.
E) All of the choices are considered investment income for the net investment income tax.

Question 73

Which of the following is not a separately stated item for S corporations?

A) Investment interest expense.
B) Charitable contributions.
C) Dividends.
D) Interest income.
E) All of the choices are separately stated items.

Question 74

The IRS may consent to an early re-election of S corporation status after a termination under which of the following:

A) The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination.
B) The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.
C) The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination.
D) The corporation had only two ineligible shareholders at the termination date.
E) None of the choices are correct.

Question 75

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 her Cook, Inc. stock after formation?

A) $20,000.
B) $30,000.
C) $80,000.
D) $60,000.
E) $120,000.

Question 76

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

A) Increase for shareholder's share of ordinary business income.
B) Decrease for shareholder's share of nondeductible items.
C) Increase for any contributions to the S corporation during the year.
D) Increase for distributions during the year.
E) None of the choices are correct.

Question 77

Which of the following is not a true statement?

A) An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes.
B) S corporation owners have a tax incentive to pay themselves a low salary.
C) For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees.
D) For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees.
E) None of the choices are false.

Question 78

Which of the following is the correct order in which loss limitation rules are applied?

A) passive loss rules 1st, basis rules 2nd, at-risk rules 3rd.
B) passive loss rules 1st, at-risk rules 2nd, basis rules 3rd.
C) basis rules 1st, passive loss rules 2nd, at-risk rules 3rd.
D) basis rules 1st, at-risk rules 2nd, passive loss rules 3rd.
E) None of the choices are correct.

Question 79

Assume Joe Harry sells his 25% interest in Joe's S Corp., Inc. to Tyrone on January 29.Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp., Inc. earned $200,000 from January 1 to January 29 and a total of$1,460,000 from January 1 through December 31 (365 days)?

A) $50,000.
B) $112,000.
C) $28,000.
D) $200,000.
E) None of the choices are correct.

Question 80

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2017, 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) $37,000.
C) $27,000.
D) $40,000.
E) None of the choices are correct.