Deck 22: S Corporations

Question 1

How do the tax laws treat family members for purposes of limiting the number of owners an S corporation may have?

Answer 1

S Corporation can have at the most 100 shareholders where family members and their estates are counted as one shareholder for counting the limit of 100.Definition of family member includes common ancestor and their lineal off springs with their spouses.Thus, it will include great-grandparents, grandparents, parents, children, grandchildren, great-grandchildren, and their spouses.

Question 2

Why is a shareholder's basis in an S corporate stock adjusted annually?

Answer 2

Shareholder's basis in an S Corporation's stock is adjusted annually to ensure incomes or losses are not double counted by the shareholders at the time of selling stock or receiving distributions.Also, ensuring that tax-exempt income and non-deductible expenses are not taxed or deducted is another reason for adjusting shareholder's basis annually.

Question 3

When is an S corporation required to pay a built-in gains tax?

Answer 3

The main purpose behind enacting built-in gain tax is to ensure that C corporations do not elect S Corporation status with a view to avoid corporate tax on sale on appreciated assets.S corporation is liable to pay built-in gain tax only if there is any unrealized built-in gain at the time of conversion of C Corporation into S Corporation.Also, built-in gain tax is applicable only if any built-in gain is recognized by S Corporation during built-in gain tax recognition period i..first 5 years for assets sales in 2011, 2012 and 2013, first 7 years for assets sales in 2009 and 2010, and first 10 years for asset sales for other years.

Question 4

Harry, Hermione, and Ron formed an S corporation called Bumblebore.Harry and Hermione both contributed cash of $25,000 to get things started.Ron was a bit short on cash but had a parcel of land valued at $60,000 (basis of $50,000) that he decided to contribute.The land was encumbered by a $35,000 mortgage.What tax bases will each of the three have in his or her or his stock of Bumblebore?

Question 5

Pine Corp. a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation.However, at the beginning of this year, Connor made a qualifying S election for Pine Corp. effective January 1.Pine Corp.reported $70,000 of C corporation earnings and profits on the effective date of the S election.This year (its first S corporation year), Pine reported business income of $50,000.Connor's basis in his Pine Corp.stock at the beginning of the year was $15,000.What is the amount and character of gain Connor must recognize on the following alternative distributions, and what is his basis in his Pine Corp.stock at the end of the year?
a.Connor received a $40,000 distribution from Pine Corp.at the end of the year.b.Connor received a $60,000 distribution from Pine Corp.at the end of the year.c.Connor received a $130,000 distribution from Pine Corp.at the end of the year.d.Connor received a $150,000 distribution from Pine Corp.at the end of the year.

Question 6

Super Corp.was organized under the laws of the state of Montana.It issued common voting stock and common nonvoting stock to its two shareholders.Is Super Corp.eligible to elect S corporation status? Why or why not?

Question 7

What adjustments are made annually to a shareholder's basis in S corporate stock and in what order? What impact do these adjustments have on a subsequent sale of stock?

Question 8

When is an S corporation is required to pay the excess net passive income tax?

Question 9

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1).If her stock basis is $10,000 at the beginning of the year, how much of this loss clears the hurdle for deductibility (assume at-risk limitation equals the tax basis limitation)? If she cannot deduct the whole loss, what happens to the remainder? Is she able to deduct the entire loss if she sells her stock at year-end?

Question 10

Carolina Corporation, an S corporation, has no corporate E P from itsyears as a C corporation.At the end of the year, it distributes a small parcel of land to its sole shareholder, Shadiya.The fair market value of the parcel is $70,000 and its tax basis is $40,000.Shadiya's basis in her stock is $14,000.Assume Carolina Corporation reported zero taxable income before considering the tax consequences of the distribution.a.What amount of gain or loss, if any, does Carolina Corporation recognize on the distribution?
b.How much gain must Shadiya recognize (if any) as a result of the distribution, what is her basis in her Carolina Corporation stock after the distribution, and what is her basis in the land?
c.What is your answer to (a) if the fair market value of the land is $25,000 rather than $70,000?
d.What is your answer to (b) if the fair market value of the land is $25,000 rather than $70,000?

Question 11

Karen is the sole shareholder of a C corporation she formed last year.If she elects S corporation status this year on February 20, when will the election become effective and why? What if she had made the election on March 20?

Question 12

Can a shareholder's basis in S corporation stock ever be adjusted to a negative number? Why or why not?

Question 13

Is the LIFO recapture tax a C corporation tax or an S corporation tax? Explain.

Question 14

Assume the same facts as in the previous problem, except that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000.In year 2, Bikes-R-Us reported ordinary income of $12,000.What amount is Jessica allowed to deduct in year 1? What are her stock and debt bases at the end of year 1? What are her stock and debt bases at the end of year 2?

Question 15

Last year, Miley decided to terminate the S corporation election of her solely owned corporation on October 17, 2010 (effective immediately), in preparation for taking it public.At the time of the election, the corporation had an accumulated adjustments account balance of $150,000 and $450,000 of accumulated E P from prior C corporation years, and Miley had a basis in her S corporation stock of $135,000.During 2011, Miley's corporation reported $0 taxable income or loss.Also, during 2011 the corporation made distributions to Miley of $80,000 and $60,000.How are these distributions taxed to Miley assuming the following?
a.Both distributions are in cash, and the first was paid on June 15 and the second on November 15.b.Both distributions are in cash, and the first was paid on June 15 and the second on September 30.c.The same facts in (b) except the June 15 distribution was a property (noncash) distribution (fair market value of distributed property equal to basis).

Question 16

JB Corporation is a C corporation owned 80 percent by Jacob and 20 percent by Bauer.Jacob would like JB to make an S election but Bauer is opposed to the idea.Can JB elect to be taxed as an S corporation without Bauer's consent? Explain.

Question 17

Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation.

Question 18

When must an S corporation make estimated tax payments?

Question 19

Birch Corp. a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception.Last year, James made a direct loan to Birch Corp.in the amount of $5,000.Birch Corp.has paid the interest on the loan but has not yet paid any principal.(Assume the loan qualifies as debt for tax purposes. For the year, Birch experienced a $25,000 business loss.What amount of the loss clears the tax basis limitation, and what is James's basis in his Birch Corp.stock and Birch Corp.debt in each of the following alternative scenarios?
a.At the beginning of the year, James's basis in his Birch Corp.stock was $45,000 and his basis in his Birch Corp.debt was $5,000.b.At the beginning of the year, James's basis in his Birch Corp.stock was $8,000 and his basis in his Birch Corp.debt was $5,000.c.At the beginning of the year, James's basis in his Birch Corp.stock was $0 and his basis in his Birch Corp.debt was $5,000.

Question 20

Alabama Corporation, an S corporation, liquidates this year by distributing a parcel of land to its sole shareholder, Mark Ingram.The fair market value of the parcel is $50,000 and its tax basis is $30,000.Mark's basis in his stock is $25,000.a.What amount of gain or loss, if any, does Alabama Corporation recognize on the distribution?
b.How much gain must Mark recognize (if any) as a result of the distributionand what is his basis in the land?
c.What is your answer to (a) if the fair market value of the land is $20,000 rather than $50,000?
d.What is your answer to (b) if the fair market value of the land is $20,000 rather than $50,000?

Question 21

In what circumstances could a calendar-year C corporation make an election on February 1, year 1, to be taxed as an S corporation in year 1 but not have the election effective until year 2?

Question 22

Is a shareholder allowed to increase her basis in her S corporation stock by her share of the corporation's liabilities, as partners are able to increase the basis of their ownership interest by their share of partnership liabilities? Explain.

Question 23

On what form does an S corporation report its income to the IRS? When is the tax return due? What information does the S corporation provide to shareholders to allow them to complete their tax returns?

Question 24

{Research} Timo is the sole owner of Jazz Inc. an S corporation.On October 31 2011, Timo executed an unsecured demand promissory note of $15,000, and he transferred the note to Jazz (Jazz could require Timo to pay it $15,000 on demand).When Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero.On January 31, 2012, Timo paid the $15,000 to Jazz as required by the promissory note.For the taxable year ending December 31, 2011, Jazz incurred a business loss of $12,000.How much of the loss clears the stock and debt basis hurdles for deductibility?

Question 25

Rivendell Corporation uses the accrual method of accounting and has the following assets as of the end of 2010.Rivendell converted to an S corporation on January 1, 2011.
a.What is Rivendell's net unrealized built-in gain at the time it converted to an S corporation?
b.Assuming the land was valued at $200,000, what would be Rivendell's net unrealized gain at the time it converted to an S corporation?
c.Assuming the original land value but that the inventory was valued at $85,000, what would be Rivendell's net unrealized gain at the time it converted to an S corporation?

Question 26

Theodore, Alvin, and Simon are equal shareholders of Timeless Corp.(an S corporation).Simon wants to terminate the S election, but Theodore and Alvin disagree.Can Simon unilaterally elect to have the S election terminated? If not, what would Simon need to do to have the S election terminated?

Question 27

How does a shareholder create debt basis in an S corporation? How is debt basis similar and dissimilar to stock basis?

Question 28

Compare and contrast S corporations, C corporations, and partnerships in terms of tax consequences at formation, shareholder restrictions, income allocation, basis calculations, compensation to owners, taxation of distributions, and accounting periods.

Question 29

Chandra was the sole shareholder of Pet Emporium that was originally formed as an S corporation.When Pet Emporium terminated its S election on August 31, 2010, Chandra had a stock basis and an at-risk amount of zero.Chandra also had a suspended loss from Pet Emporium of $9,000.What
amount of the suspended loss is Chandra allowed to deduct, and what is her basis in her Pet Emporium stock at the end of the post-termination transition period under the following alternative scenarios (assume Pet Emporium files for an extension to file its tax returns)?
a.Chandra makes capital contributions of $7,000 on August 30, 2011, and $4,000 on September 14, 2011.b.Chandra makes capital contributions of $5,000 on September 1, 2011, and $5,000 on September 30, 2011.c.Chandra makes a capital contribution of $10,000 on August 31, 2011.d.Chandra makes a capital contribution of $10,000 on October 1, 2011.

Question 30

Virginia Corporation is a calendar-year corporation.At the beginning of 2011, its election to be taxed as an S corporation became effective.Virginia Corp.s balance sheet at the end of 2010 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation).
In 2011, Virginia reported business income of $50,000 (this would have been its taxable income if it were still a C corporation).What is Virginia's built-in gains tax in each of the following alternative scenarios?
a.During 2010, Virginia sold inventory it owned at the beginning of the year for $100,000.The basis of the inventory sold was $55,000.b.Assume the same facts as (a), except Virginia had a net operating loss carryover of $24,000 from its time as a C corporation.c.Assume the same facts as (a), except that if Virginia were a C corporation, its taxable income would have been $1,500.

Question 31

Juanita is the sole shareholder of Belize Corporation (a calendar-year S corporation).She is considering revoking the S election.It is February 1, year 1.What options does Juanita have for timing the effective date of the S election revocation?

Question 32

When an S corporation shareholder has suspended losses due to the tax basis or at-risk limitation, is he allowed to deduct the losses if the S corporation status is terminated? Why or why not?

Question 33

Julie wants to create an S corporation called J's Dance Shoes (JDS).Describe how the items below affect her eligibility for an S election.a.Because Julie wants all her shareholders to have an equal say in the future of JDS, she gives them equal voting rights and decides shareholders who take a more active role in the firm will have priority in terms of distribution and liquidation rights.b.Julie decides to incorporate under the state laws of Utah, since that is where she lives.Once she gets her business up and running, however, she plans on doing extensive business in Mexico.

Question 34

{Planning} Neil owns stock in two S corporations, Blue and Green.He actively participates in the management of Blue but maintains ownership in Green only as a passive investor.Neil has no other business investments.Both Blue and Green anticipate a loss this year, and Neil's basis in his stock of both corporations is zero.All else equal, if Neil plans on making a capital contribution to at least one of the corporations this year, to which firm should he contribute in order to increase his chances of deducting the loss allocated to him from the entity? Why?

Question 35

Tempe Corporation is a calendar-year corporation.At the beginning of 2011, its election to be taxed as an S corporation became effective.Tempe Corp.s balance sheet at the end of 2010 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation):
Tempe's business income for the year was $40,000 (this would have been its taxable income if it were a C corporation).a.During 2011, Tempe sold all of the inventory it owned at the beginning of the year for $210,000.What is its built-in gains tax in 2011?
b.Assume the same facts as in (a), except that if Tempe were a C corporation, its taxable income would have been $7,000.What is its built-in gains tax in 2011?
c.Assume the original facts except the land was valued at $140,000 instead of $120,000.What is Tempe's built-in gains tax in 2011?

Question 36

Describe the circumstances in which an S election may be involuntarily terminated.

Question 37

When considering C corporations, the IRS checks to see whether salaries paid are too large.In S corporations, however, it usually must verify that salaries are large enough.Account for this difference.

Question 38

{Research} Lucy and Ricky Ricardo live in Los Angeles, California.After they were married, they started a business named ILL Corporation (a C corporation).For state law purposes, the shares of stock in ILL Corp.are listed under Ricky's name only.Ricky signed the Form 2553 electing to have ILL taxed as an S corporation for federal income tax purposes, but Lucy did not sign.Given that California is a community property state, is the S election for ILL Corp.valid?

Question 39

{Research} In the past several years, Shakira had loaned money to Shakira Inc.(an S corporation) to help the corporation keep afloat in a downturn.Her stock basis in the S corporation is now zero, and she had deducted $40,000 in losses that reduced her debt basis from $100,000 to $60,000.Things appear to be turning around this year, and Shakira Inc.repaid Shakira $20,000 of the $100,000 outstanding loan.What is Shakira's income, if any, on the partial loan repayment?

Question 40

Wood Corporation was a C corporation in 2010 but elected to be taxed as an S corporation in 2011.At the end of 2010, its earnings and profits were $15,500.The following table reports Wood's (taxable) income for 2011 (its first year as an S corporation).
What is Wood Corporation's excess net passive income tax for 2011?

Question 41

Describe a situation in which a former C corporation that elected to be taxed as an S corporation may have its S election automatically terminated, but a similarly situated corporation that has always been taxed as an S corporation would not.

Question 42

How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?

Question 43

Jane has been operating Mansfield Park as a C corporation and decides she would like to make an S election.What is the earliest the election will become effective under each of these alternative scenarios?
a.Jane is on top of things and makes the election on January 1, 2011.b.Jane is mostly on top of things and makes the election on January 15, 2011.c.Jane makes the election on February 10, 2011.She needed a little time to convince a C corporation shareholder to sell its stock to a qualifying shareholder.That process took all of January, and she was glad to have it over with.d.Jane makes the election on March 14, 2011.e.Jane makes the election on February 5, 2011.One of the shareholders refused to consent to the S election.He has since sold his shares (on January 15, 2011) to another shareholder who approved the idea.But he never did consent to the election.

Question 44

Adam Fleeman, a skilled carpenter, started a home improvement business with Tom Collins, a master plumber.Adam and Tom are concerned about the payroll taxes they will have to pay.Assume they form an S corporation, and each earns a salary of $80,000 from the corporation; in addition, they expect their share of business profits to be $60,000 each.How much Social Security tax and Medicare tax (or self-employment tax) will Adam, Tom, and their corporation have to pay on their salary and profits in 2011?

Question 45

Calculate Anaheim Corporation's excess net passive income tax in each of the following alternative scenarios:
a.Passive investment income, $100,000; expenses associated with passiveinvestment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E P, $30,000.b.Passive investment income, $100,000; expenses associated with passiveinvestment income, $70,000; gross receipts, $120,000; taxable income if C corporation, $1,200; corporate E P, $30,000.c.Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E P, $0.

Question 46

When a corporation's S election is terminated mid-year, what options does the corporation have for allocating the annual income between the S corporation short year and the C corporation short year?

Question 47

If a corporation has been an S corporation since inception, describe how its operating distributions to its shareholders are taxed to the shareholders.

Question 48

Missy is one of 100 unrelated shareholders of Dalmatian, an S corporation.She is considering selling her shares.Under the following alternative scenarios, would the S election be terminated? Why or why not?
a.Missy wants to sell half her shares to a friend, a U..citizen, so they can rename their corporation 101 Dalmatians.b.Missy's mother's family wants to be involved with the corporation.Missy splits half her shares evenly among her aunt, uncle, grandfather, and two cousins.c.Missy sells half her Dalmatian stock to her husband's corporation.

Question 49

{Planning} Using the facts in problem 60, could Adam and Tom lower their payroll tax exposure if they operated their business as a partnership? Why or why not?

Question 50

Mark is the sole shareholder of Tex Corporation.Mark firstformed Tex as a C corporation.However, in an attempt to avoid having Tex'sincome double taxed, Mark elected S corporation status for Tex several yearsago.On December 31, 2011, Tex reports $5,000 of earnings and profits from itsyears as a C corporation and $50,000 in its accumulated adjustments account from its activities as an S corporation (including its 2011 activities).Mark discovered that for the first time Tex was going to have to pay the excess net passive income tax.Mark wanted to avoid having to pay the tax but he determined the only way to avoid the tax was to eliminate Tex's E P by the end of 2011.He determined that, because of the distribution ordering rules (AAA first), he would need to have Tex immediately (in 2011) distribute $55,000 to him.This would clear out Tex's accumulated adjustments account first and then eliminate Tex's C corporation earnings and profits in time to avoid the excess net passive income tax.Mark was not sure Tex could come up with $55,000 of cash or property in time to accomplish his objective.Does Mark have any other options to eliminate Tex's earnings and profits without first distributing the balance inTex's accumulated adjustments account?

Question 51

On June 1, year 1, Jasper Corporation's S election was involuntarily terminated.What is the earliest Jasper may be taxed as an S corporation again? Are there any exceptions to the general rule? Explain.

Question 52

How are the tax consequences of a cash distribution different from those of a non-cash property distribution to both the corporation and the shareholders?

Question 53

Cathy, Heathcliff, and Isabelle are equal shareholders in Wuthering Heights (WH), an S corporation.Heathcliff has decided he would like to terminate the S election.In the following alternative scenarios, indicate whether the termination will occur and indicate the date if applicable (assume no alternative termination dates are selected).a.Cathy and Isabelle both decline to agree to the termination.Heathcliff files the termination election anyway on March 14, 2011.b.Isabelle agrees with the termination, but Cathy strongly disagrees.The termination is filed on February 16, 2011.c.The termination seems to be the first thing all three could agree on.They file the election to terminate on March 28, 2011.d.The termination seems to be the first thing all three could agree on.They file the election to terminate on February 28, 2011.e.Knowing the other two disagree with the termination, on March 16, 2011, Heathcliff sells one of his 50 shares to his maid, who recently moved back to Bulgaria, her home country.

Question 54

Friends Jackie (0. percent owner), Jermaine (1 percent owner), Marlon (2 percent owner), Michael (86 percent owner), and Tito (10. percent owner) are shareholders in Jackson 5 Inc.(an S corporation).As employees of the company, they each receive health insurance ($10,000 per year benefit), dental insurance ($2,000 per year benefit), and free access to a workout facility located at company headquarters ($500 per year benefit).What are the tax consequences of these benefits for each shareholder and for Jackson 5 Inc.

Question 55

{Planning} Farve Inc.recently elected S corporation status.At the time of the election, the company had $10,000 of accumulated earnings and profits, and a net unrealized gain of $1,000,000 associated with land it had invested in (although some parcels had an unrealized loss).In the next couple of years, most of the income the company expects to generate will be in the form of interest and dividends (approximately $200,000 per year).However, in the future, the company will want to liquidate some of its current holdings in land and possibly reinvest in other parcels.What strategies can you recommend for Farve Inc.to help reduce its potential tax liability as an S corporation?

Question 56

Apple Union (AU), a C corporation with a March 31 year-end, uses the accrual method of accounting.If AU elects to be taxed as an S corporation, what will its year-end and overall method of accounting be (assuming no special elections)?

Question 57

What role does debt basis play in determining the taxability of operating distributions to shareholders?

Question 58

Assume the following S corporations and gross receipts, passive investment income, and corporate E P.Will any of these corporations have its Selection terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1.a.Clarion Corp.
b.Chanson Corp.
c.Caillou Corp.
d.Colline Corp

Question 59

Maple Corp. a calendar-year corporation, was formed three years agoby its sole shareholder, Brady, who immediately elected S corporation status.On December 31 of the current year, Maple distributed $30,000 cash to Brady.What is the amount and character of gain Brady must recognize on the distribution in each of the following alternative scenarios?
a.At the time of the distribution, Brady's basis in his Maple Corp.stock was $35,000.b.At the time of the distribution, Brady's basis in his Maple Corp.stock was $8,000.c.At the time of the distribution, Brady's basis in his Maple Corp.stock was $0.

Question 60

Until the end of year 0, Magic Carpets (MC) was a C corporation with a calendar year.At the beginning of year 1 it elected to be taxed as an S corporation.MC uses the LIFO method to value its inventory.At the end of year 0, under the LIFO method, its inventory of rugs was valued a $150,000.nder the FIFO method, the rugs would have been valued at $170,000.How much
LIFO recapture tax must MC pay, and what is the due date of the first payment under the following alternative scenarios?
a.Magic Carpets' regular taxable income in year 0 was $65,000.b.Magic Carpets' regular taxable income in year 0 was $200,000.

Question 61

Compare and contrast the method of allocating income or loss to owners for partnerships and for S corporations.

Question 62

What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?

Question 63

Hughie, Dewey, and Louie are equal shareholders in HDL, an S corporation.HDL's S election terminates under each of the following alternative scenarios.When is the earliest it can again operate as an S corporation?
a.The S election terminates on August 1, year 2, because Louie sells half his shares to his uncle Walt, a citizen and resident of Scotland.b.The S election terminates effective January 1, year 3, because on August 1, year 2, Hughie and Dewey vote (2 to 1) to terminate the election.

Question 64

Oak Corp. a calendar-year corporation, was formed three years ago by its sole shareholder, Glover, and has always operated as a C corporation.However, at the beginning of this year, Glover made a qualifying S election for Oak Corp. effective January 1.Oak Corp.did not have any C corporation earnings and profits on that date.On June 1, Oak Corp.distributed $15,000 to Glover.What is the amount and character of gain Glover must recognize on the distribution, and what is his basis in his Oak Corp.stock in each of the following alternative scenarios?
a.At the time of the distribution, Glover's basis in his Oak Corp.stock was $35,000.b.At the time of the distribution, Glover's basis in his Oak Corp.stock was $8,000.c.At the time of the distribution, Glover's basis in his Oak Corp.stock was $0.

Question 65

Knowshon, sole owner of Moreno Inc. is contemplating electing S status for the corporation.Provide recommendations related to Knowshon's election under the following alternative scenarios:
a.At the end of the current year, Moreno Inc.has a net operating loss of $800,000 carryover.Beginning next year, the company expects to return to profitability.Knowshon projects that Moreno will report profits of $400,000, $500,000, and $600,000 over the next three years.What suggestions
do you have regarding the timing of the S election? Explain.b.How would you answer (a) if Moreno Inc.had been operating profitably for several years and thus had no net operating loss?
c.While several of Moreno Inc.s assets have appreciated in value (to the tune of $2,000,000), the corporation has one property-some land in a newly identified flood zone-that has declined in value by $1,500,000.Knowshon plans on selling the loss property in the next year or two.Assume that Moreno does not have a net operating loss.What suggestions do you have for timing the sale of the flood zone property and why?

Question 66

In general terms, how are C corporations different from and similar to S corporations?

Question 67

Why must an S corporation report separately stated items to its shareholders? How is the character of a separately stated item determined? How does the S corporation report this information to each shareholder?

Question 68

If an S corporation with accumulated E P makes a distribution, from what accounts (and in what order) is the distribution deemed to be paid from?

Question 69

Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation.In the conditions listed below, how much income should each report from SleepEZ for 2011 under both the daily allocation and the specific identification allocation method? Refer to the following table for the timing of SleepEZ's income.
a.There are no sales of SleepEZ stock during the year.b.On March 16, 2011, Blinkin sells his shares to Nod.c.On March 16, 2011, Winkin and Nod each sell their shares to Blinkin.

Question 70

Janna has a tax basis of $15,000 in her Mimikaki stock (Mimikaki has been an S corporation since inception).In 2011, Janna was allocated $20,000 of ordinary income from Mimikaki.What is the amount and character of gain she recognizes from end of the year distributions in each of the following alternative scenarios, and what is her stock basis following each distribution?
a.Mimikaki distributes $10,000 to Janna.b.Mimikaki distributes $20,000 to Janna.c.Mimikaki distributes $30,000 to Janna.d.Mimikaki distributes $40,000 to Janna.

Question 71

Barry Potter and Winnie Weasley are considering making an Selection on March 1, 2011, for their C corporation, Omniocular.However, first they want to consider the implications of the following information:
• Winnie is a U..citizen and resident.• Barry is a citizen of the United Kingdom, but a resident of the United States.• Barry and Winnie each own 50 percent of the voting power in Omniocular.However, Barry's stock provides him with a claim on 60 percent of the Omniocular assets in liquidation.• Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico.a.Is Omniocular eligible to elect S corporation status? If so, when is the election effective?
For the remainder of the problem, assume Omniocular made a valid Selection effective January 1, 2011.Barry and Winnie each own 50 percent of the voting power and have equal claim on Omniocular's assets in liquidation.In addition, consider the following information:
• Omniocular reports on a calendar tax year.• Omniocular's earnings and profits as of December 31, 2010, were $55,000.• Omniocular's 2010 taxable income was $15,000.• Omniocular's assets at the end of 2010 are as follows:
• On March 31, 2011, Omniocular sold the land for $42,000.• In 2011, Omniocular sold all the inventory it had on hand at the beginning of the year.This was the only inventory it sold during the year.
• Assume that if Omniocular were a C corporation for 2011, its taxable income would have been $88,500.b.How much LIFO recapture tax is Omniocular required to pay and when is it due?
c.How much built-in gains tax, if any, is Omniocular required to pay?
d.How much excess net passive income tax, if any, is Omniocular required to pay?
e.Assume Barry's basis in his Omniocular stock was $40,000 on January 1,
2011.What is his stock basis on December 31, 2011?
For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular's Selection, effective August 1, 2012.
f.For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omnicular's income?
g.Assume in part (f ) that Omnicular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income.If Barry's stock basis in his Omnicular stock on January 1, 2012, is $50,000, what is his stock basis on December 31, 2012?
h.When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

Question 72

What are the limitations on the number and type of shareholders an S corporation may have? How are these limitations different from restrictions on the number and type of shareholders C corporations or partnerships may have?

Question 73

How do S corporations report dividends they receive? Are they entitled to a dividends received deduction? Why or why not?

Question 74

Under what circumstances could a corporation with earnings and profits make a tax-free distribution to its shareholders after the S election termination?

Question 75

Jack and Jill are owners of UpAHill, an S corporation.They own 25 and 75 percent, respectively.a.What amount of ordinary income and separately stated items are allocated
to them for years 1 and 2 based on the information above?
b.Complete UpAHill's Form 1120S, Schedule K, for year 1.c.Complete Jill's 1120S, Schedule K-1, for year 1.

Question 76

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2.Johnstone's earnings and profits at the end of year 1 were $10,000.Marcus is Johnstone's sole shareholder.What is Johnstone's accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios?
a.Johnstone distributed $6,000 to Marcus in year 2.b.Johnstone distributed $10,000 to Marcus in year 2.c.Johnstone distributed $16,000 to Marcus in year 2.d.Johnstone distributed $26,000 to Marcus in year 2.

Question 77

Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago.While Abigail and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner.Consider the following information for 2011:
• As of January 1, 2011, Abigail, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0.On January 1, the stock basis is also the at-risk amount for each shareholder.• Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2011.Neither has any other source of passive income (besides Lafter, for Claudia).• On March 31, 2011, Abigail lends $5,000 of her own money to Lafter.• Anticipating the need for basis to deduct a loss, on April 4, 2011, Bobby takes out a loan using his car as collateral-he wants to limit his losses to the value of the automobile just in case he can't pay back the loan-to make a contribution of $10,000 to Lafter.• Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2011.• Lafter has C corporation earnings and profits of $15,000 as of January 1, 2011.• During 2011, Lafter reports a business loss of $75,000, computed as follows:
• Lafter also reported $12,000 of tax-exempt interest income.a.What amount of Lafter's 2011 business loss of $75,000 tax loss are Abigail, Bobby, and Claudia allowed to deduct on their individual tax returns? What are each owner's stock basis and debt basis (if applicable) and each owner's at-risk amount with respect to the investment in Lafter at the end of 2011?
• During 2012, Lafter made several changes to its business approach and reported $18,000 of business income, computed as follows:
• Lafter also reported a long-term capital gain of $24,000 in 2012.• Lafter made a cash distribution on July 1, 2012, of $20,000 to each shareholder.b.What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2012?

Question 78

Why can't large, publicly traded corporations be treated as S corporations?

Question 79

Shawn receives stock in an S corporation when it is formed by contributing land with a tax basis of $50,000 and encumbered by a $20,000 mortgage.What is Shawn's initial basis in his S corporation stock?

Question 80

How do the tax consequences of S corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels?