Deck 11: US Corporations

Question 1

Martha,a U.S.citizen,owns 40% of the stock of George Corporation,an electing S corporation.At the time of her death this year,the George stock passes to her estate.The stock is subsequently transferred to a trust provided for in Martha's will.Can the testamentary trust hold the George stock for a two-year period before the S election is terminated?

Answer 1

The trust can hold the S corporation stock for an indefinite period of time only if the trust's income beneficiary makes an election to have it treated as a QSST or small business trust.Otherwise,the S election will be terminated at the end of the two-year period.

Question 2

Identify which of the following statements is true.

A)Convertible debt issues might be considered "stock" for purposes of the S corporation single class of stock requirement.
B)The S election must be made no later than the fifteenth day of the fourth month of the tax year for which the election is to be effective.
C)A majority of shareholders must consent to the S corporation election.
D)All of the above are false.

Answer 2

A

Question 3

Corporations and partnerships can be S corporation shareholders.

Answer 3

False

Question 4

VJ Corporation is to be owned equally by Vic and Joe.The corporation will be formed by exchanging the assets and liabilities of the V & J Manufacturing Partnership for all the corporation's stock on September 1 of the current year.Both shareholders use the calendar year as their tax year and desire to make an S election.What tax issues should Vic and Joe consider with respect to the incorporation?

Question 5

Identify which of the following statements is true.

A)A trust can own S corporation stock and have a C corporation as a beneficiary as long as the corporation is the sole beneficiary.
B)A QSST is an arrangement whereby the stock owned by a number of shareholders is placed under trust control for purposes of exercising the stock voting rights.
C)A testamentary trust can be converted into a QSST trust.
D)All of the above are false.

Question 6

Which of the following statements about stock ownership is not correct?

A)A C corporation can own stock of an S corporation.
B)An S corporation can own stock of a C corporation.
C)A tax-exempt charity can own stock of an S corporation.
D)An S corporation can own stock of a Qualified Subchapter S Subsidiary.

Question 7

A testamentary trust can be an S shareholder for two years,beginning on the date the stock transfers to the trust.

Question 8

Which one of the following is not one of the corporation-related requirements for S corporation status?

A)The corporation must be a domestic corporation.
B)The corporation must not have any foreign-sourced income.
C)The corporation must not be an "ineligible" corporation.
D)The corporation must have only one class of stock.

Question 9

Which one of the following individuals or entities is ineligible to be an S corporation shareholder?

A)an estate
B)resident alien of the United States
C)a voting trust where all of the beneficiaries are U.S.citizens
D)a partnership where all of the partners are U.S.citizens

Question 10

Identify which of the following statements is true.

A)A partnership can be an S corporation shareholder.
B)A nonresident alien can be an S corporation shareholder.
C)An S corporation can have more than 100 shareholders,since families are treated as a single shareholder.
D)All of the above are false.

Question 11

Identify which of the following statements is true.

A)The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.
B)A partnership can elect to be taxed as a corporation under the check-the-box regulations.As a corporation,an S election can be made.
C)For C corporations that desire to be taxed like a partnership,the S corporation rules provide a practical alternative for an existing C corporation to obtain many of the tax benefits of being taxed as a partnership.
D)All of the above are true.

Question 12

Trusts that can own S corporation stock include all of the following except

A)charitable remainder unitrusts.
B)QSSTs.
C)grantor trusts.
D)testamentary trusts.

Question 13

Alligood Corporation has two classes of common stock outstanding.The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation.Class A stock has one vote per share.Class B stock is nonvoting.Alligood Corporation may

A)not make the S election due to different voting rights.
B)make the S election once the Class B is retired.
C)make the S election at any time.
D)not make the S election due to two classes of stock.

Question 14

Which of the following corporate tax levies are imposed on an S corporation?

A)corporate income tax
B)corporate alternative minimum tax
C)accumulated earnings tax
D)None of these taxes are imposed on an S corporation.

Question 15

Up to six generations of a family are considered as one shareholder for purposes of the 100-shareholder limit.

Question 16

Identify which of the following statements is true.

A)An S corporation cannot own any stock of another corporation.
B)An S corporation cannot own 100% of the stock of another S corporation.
C)An S corporation that owns all of the stock of a Qualified Subchapter S Subsidiary (QSub)must report all the income,deductions,and losses of the subsidiary on its own tax return.
D)All of the above are true.

Question 17

List and discuss five advantages and five disadvantages of electing to be taxed as an S corporation over a C corporation or a partnership.

Question 18

Mary,a U.S.citizen,owned 25% of the stock of Floran Corporation,an electing S corporation.At the time of her death,the Floran stock may go to all the following without affecting the S election except

A)her estate.
B)a testamentary trust.
C)a small business trust.
D)a charitable remainder unitrust.

Question 19

The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.

Question 20

Shamrock Corporation has two classes of common stock outstanding.The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation.Class A has one vote per share.Class B is nonvoting.Can Shamrock Corporation make an S corporation election?

Question 21

Davies Corporation is a calendar-year taxpayer that is owned equally by Vivian,Rob,Danny,and Doug Davies.At the close of business on May 31,Rob Davies sells his 25% stock interest to Paula Bryan.Which of the following statements about the S election is correct?

A)Paula must consent to the S election,otherwise the election terminates at the close of business on May 31.
B)A new S election form must be filed by June 30 of the same year,with all shareholders consenting to the election.If a new S election is not filed,the election terminates on June 30 of that year.
C)Paula has 30 days to terminate the S election,otherwise the election remains in place for the entire year and all subsequent years.
D)None of the above statements are correct.

Question 22

Identify which of the following statements is false.

A)A C corporation short-year income tax liability must be determined on an annualized basis.
B)If the termination of an S election is considered to be inadvertent,then the election is permitted to continue in place as if the termination had never occurred.
C)If an S election is terminated and the termination is not considered to be inadvertent,a ten-tax-year waiting period is required before making a new election.
D)A corporation can obtain relief for a late S election if the IRS consents.

Question 23

The passive income test relating to an S corporation election is applied

A)daily.
B)monthly.
C)quarterly.
D)annually.

Question 24

April Corporation's Subchapter S election was voluntarily terminated for 2010.The first year that April would be eligible to reelect S corporation status is

A)2012.
B)2013.
C)2014.
D)2015.

Question 25

A C corporation was formed five years ago and is a fiscal-year taxpayer with a June 30 year-end.The C corporation wants to make an S election for its tax year beginning in the current year.The election must be made by ________ (assuming permission can be obtained to continue using the fiscal year from the IRS).

A)June 30 of the current year
B)September 15 of the current year
C)June 30 of the next year
D)September 15 of the next year

Question 26

A corporation must make an S election for the current year after March 15 in the case of a calendar-year corporation.

Question 27

Swamp Corporation,a calendar-year taxpayer,has been an S corporation for several years.However,the corporation has become quite profitable,and management feels that it would be advantageous to make a public stock offering.What are Swamp Corporation's options concerning the date of revocation of the S election?

Question 28

Which of the following conditions will not cause an S election to be terminated?

A)exceeding the 100-shareholder limit
B)creating a second class of stock having a dividend preference
C)selecting an improper tax year
D)failing to file a timely tax return

Question 29

Identify which of the following statements is true.

A)All of the shareholders of an S corporation must consent to a revocation of the S election.
B)A revocation of an S corporation election can be retrospective to any date.
C)An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C E&P.
D)All of the above are true.

Question 30

Identify which of the following statements is true.

A)An S corporation should have a buy-sell agreement to guard itself against an ill-advised sale of its stock.
B)The terms "small business corporation" and "S corporation" are synonymous.
C)A regular corporation has common and preferred stock outstanding on January 1.On January 2,the preferred stock is canceled in a recapitalization,leaving only common stock outstanding.The corporation can make an S election for this tax year.
D)All of the above are false.

Question 31

Garret and Hans own all the stock of GH Corporation.Garret sells all his GH stock to Olga on February 12.The next day,GH makes an S election.For the election to apply to the current year,who must consent to the election?

Question 32

If an S corporation inadvertently terminates its election,the IRS

A)may permit the corporation to report as an S corporation even for the period that includes the termination date.
B)will not permit the corporation to restore its S election until the completion of a five-year waiting period.
C)will permit restoration of the S election only if the event causing the termination was not within the control of the corporation.
D)will permit restoration of the S election if a majority of the shareholders consent to the reinstatement.

Question 33

The election of Subchapter S status by a corporation is valid only if all shareholders consent to the election.

Question 34

On June 30 of the current year,the S election of Great Corporation is terminated,thus creating a six-month S short year and a six-month C short year.Great Corporation is a calendar-year taxpayer.The S short-year return is due

A)September 15.
B)December 15.
C)March 15 of the next year.
D)June 30 of the next year.

Question 35

Identify which of the following statements is true.

A)Shareholders who acquire stock in an S corporation after the election date and prior to the election's effective date must consent to the election.
B)S corporation consent by shareholders is binding on the current tax year and all future tax years.
C)Only shareholders who own stock on the date an S election takes effect must consent to the election.
D)All of the above are false.

Question 36

Helmut and Sergei own all the stock of Zappo Corporation,a calendar-year domestic corporation.On January 30 of the current year,Sergei sells his entire interest in the Zappo stock to Nils.All three individuals are U.S.citizens.Can an S election be made for the current year?

A)not for the current year but for the next year
B)Yes,if Helmut and Nils agree to report all of the corporation's income for the entire year
C)Yes,if Sergei will also join in the election with Helmut and Nils
D)Yes,if Helmut and Nils agree to file a short-period return and Sergei also agrees to the return

Question 37

Krause Corporation makes an S election,believing that it has no current or accumulated E&P.However,after an IRS audit,Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C E&P balance from its three pre-election tax years.The IRS will

A)automatically terminate the election and Krause cannot reelect for a 5-year time period.
B)retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
C)treat the error as such and allow the election to continue unbroken.
D)likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C E&P.

Question 38

All shareholders must consent to the revocation of S status.

Question 39

Which of the following would terminate a Subchapter S election?

A)Estate becomes a shareholder.
B)Grantor trust becomes a shareholder.
C)Voting trust becomes a shareholder.
D)Partnership becomes a shareholder.

Question 40

Even if the termination of an S election is considered to be inadvertent,the election to terminate is irrevocable.

Question 41

King Corporation,a cash method taxpayer that uses the calendar year as its tax year,was incorporated on June 1,1984.The corporation made its initial S election on December 1 of last year,effective for the current tax year.Earnings and profits of $60,000 have been retained from C corporation tax years.Which one of the following events results in the recognition of a built-in gain?

A)collection of accounts receivable in the current year that resulted from services performed last year
B)collection of interest income earned in the current year on bonds purchased on January 1 of last year
C)collection of dividends declared on April 5 of the current year on stock purchased on February 14 of the current year
D)None of the above are built-in gains.

Question 42

Bellows Corporation,a calendar-year taxpayer,has been an S corporation for ten years.Last year,John sold all the Bellows stock to Micky.Payments for the stock are to be made over a five-year period.In March of next year,Micky fails to make the necessary payments and John repossesses the stock.During the time Micky holds the stock,Bellows Corporation revokes its S election.Can Bellows Corporation reelect S status?

Question 43

Tax-exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the shareholders' gross income.

Question 44

Zinc Corporation is created in the current year and promptly makes an S election.How much passive income can it earn this year without fear of losing its S corporation status or being subject to the Sec.1375 tax on excess net passive income?

Question 45

Identify which of the following statements is true.

A)The natural business year for fiscal-year election purposes is any tax year that ends within six months after the peak period of business.
B)Section 444 permits an S corporation to elect to use a fiscal year other than a permitted year.
C)A new corporation that is 100% owned by Johnny Blake,a cash method of accounting taxpayer,makes an S election for its initial tax year.The S corporation must also elect to use the cash method of accounting as its overall accounting method.
D)All of the above are false.

Question 46

An S corporation is permitted to claim

A)the dividends-received deduction.
B)a personal exemption.
C)a deduction based on the amortization of organizational expenditures.
D)a net operating loss.

Question 47

Shanghai Corporation was organized and elected S status in the current year.How much passive investment income can Shanghai earn and retain its S status?

A)none
B)80% of gross receipts
C)50% of gross receipts
D)no limit

Question 48

Identify which of the following statements is true.

A)Beach Corporation,an S corporation,has gross receipts of $240,000;taxable income of $120,000;passive investment income of $100,000;and expenses directly attributable to the passive investment income of $20,000.The corporation's excess net passive income is $32,000.
B)The built-in gains tax applicable to S corporations can be avoided if the property is held for ten years.
C)An S corporation generally will not owe the built-in gains tax if the corporation has never been a C corporation.
D)All of the above are true.

Question 49

Woods Corporation has operated as a C corporation for the last seven years.The corporation has assets with a $500,000 adjusted basis and a $700,000 FMV.Liabilities are $200,000.Wolf Woods,a calendar-year taxpayer,owns all of the Woods Corporation stock.The corporation has a June 30 year-end and uses the accrual method of accounting.In order to reduce his total combined corporate and personal federal income tax liability,Wolf's CPA has told him to convert the corporation to S corporation status.Wolf would like to complete the conversion on the last day of the corporation's tax year.What tax issues should Wolf and his CPA consider with respect to the S election?

Question 50

Connie's Restaurant has been an S corporation since it was formed in 2006.Its results for the previous year are as follows:
What are Connie's separately stated items? What is the S corporation's ordinary income?

Question 51

When a Sec.444 fiscal-year election is made,the S corporation makes required payments to the IRS in order to continue to use the fiscal year as its tax year.Which of the following statements about the tax year is correct?

A)The Sec.444 payment is deductible by the S corporation as an income tax.
B)The Sec.444 payment is allocated ratably to each shareholder and claimed as a tax payment on their own tax return(s).
C)The Sec.444 payments are refundable if the S election is terminated.
D)The Sec.444 payments must be made quarterly on the same dates that the S corporation's estimated tax payments are otherwise due.

Question 52

Which of the following items is not separately stated for an S corporation?

A)short-term capital gain
B)dividend income
C)Section 1245 income
D)charitable contribution

Question 53

For an S corporation to elect to use a fiscal year other than a permitted year,the fiscal year elected must have a maximum deferral period of

A)one month.
B)two months.
C)three months.
D)six months.

Question 54

Potter Corporation reports the following results for the current year:
At the end of the year,Potter's Subchapter C E&P is $50,000.What is the amount of Potter's excess net passive income?

Question 55

Power Corporation reports the following results:
At the end of the year,Power's Subchapter C E&P is $50,000.What is Power Corporation's excess net passive income and its excess net passive income tax for the year?

Question 56

Chuck Corporation reports the following results for this year:
At the end of this year,Chuck's E&P for its C corporation tax years amount to $30,000.Compute Chuck Corporation's excess net passive income.

Question 57

Identify which of the following statements is true.

A)An election for an S corporation to use the Sec.179 expensing election is made by the corporation and not by its shareholders.
B)The S corporation's separately stated items are in general the same ones that apply in partnership taxation.
C)An S corporation cannot claim a dividends-received deduction.
D)All of the above are true.

Question 58

Identify which of the following statements is true.

A)Perry Corporation,an S corporation,receives $10,000 of dividends from a 25%-owned domestic corporation.Perry is allowed an 80% dividends-received deduction with respect to the distribution.
B)An NOL is incurred by a C corporation in the current tax year.The C corporation makes an S election for the following tax year.The entire C corporation NOL carryover can be passed through to the S corporation's shareholders at the end of the following tax year.
C)Tax-exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the shareholders' gross income.
D)All of the above are false.

Question 59

The recognition period for the built-in gains tax extends for how many years after the S election takes effect?

A)one year
B)three years
C)five years
D)ten years

Question 60

Boxer Corporation,a C corporation,elects on June 30 of last year to make an S election for the current year.The net unrealized built-in gains at the beginning of the current year are $300,000.The net recognized built-in gains in the current year are $110,000.What is Boxer's built-in gains tax for the current year?

Question 61

An S corporation reports ordinary income of $120,000 after deducting $20,000 for Fred's salary.Fred and his three children own the S corporation equally.The IRS determines Fred's stock transfer to his three children is not bona fide.Reasonable compensation for Fred is $40,000.How much of the S corporation's $140,000 pre-salary income must be reported by Fred?

A)$140,000
B)$100,000
C)$50,000
D)$40,000

Question 62

If losses are suspended due to the lack of basis in S corporation stock,do the losses expire when the S election terminates?

Question 63

Cactus Corporation,an S Corporation,had accumulated earnings and profits of $100,000 at the beginning of 2008.Tex and Shirley each own 50% of the stock.Cactus does not make any distributions during 2008,but had $200,000 of ordinary income.In 2009,ordinary income was $100,000 and distributions were $100,000.What is Tex's ordinary income for 2008?

A)$0
B)$50,000
C)$100,000
D)$200,000

Question 64

S shareholders cannot increase the basis of their stock by a ratable share of the general S corporation liabilities.

Question 65

Identify which of the following statements is false.

A)Randy is a shareholder in an S corporation.His stock basis is $10,000 and his basis in a loan he made to the corporation is $3,000.Randy's share of the corporation's ordinary loss for the current year is $11,000.Ignoring the at-risk and passive activity limitations,Randy can deduct the loss in full.
B)A shareholder's S corporation stock basis will increase when the shareholder acts as guarantor on a corporate indebtedness.
C)A shareholder's ratable share of the S corporation's ordinary loss reduces the adjusted basis of his/her S corporation stock.Once the basis of the stock is reduced to zero,any loss-passthrough that remains reduces the basis of S corporation debts that are owed to the shareholder.
D)Debt basis is restored before stock basis.

Question 66

What is a permitted year?

Question 67

Identify which of the following statements is true.

A)Long-term capital gains may be subject to double taxation if the gains are subject to both the excess net passive income tax rules and the built-in gains tax rules.
B)Special allocations of ordinary income or loss and separately stated items that are available for partnerships are also permitted with S corporations.
C)When an S corporation's shares are sold by a shareholder during a tax year,the transferee's share of the earnings is reported from the day after the transfer date through the end of the tax year.
D)All of the above are false.

Question 68

S shareholders are allocated shares of income,gain,loss,deduction,and credit based on their number of shares of stock and period of time for which the stock is held.

Question 69

For the calendar year,Elk Corporation,an S corporation,has book income of $55,000,which includes $45,000 from operations and a $10,000 net long-term capital gain.During the year,$22,500 is distributed to Elk's three equal shareholders,all of whom are calendar-year taxpayers.What are Elk's total ordinary income and capital gain pass-throughs for the year?

Question 70

Cactus Corporation,an S Corporation,had accumulated earnings and profits of $100,000 at the beginning of 2011.Tex and Shirley each own 50% of the stock.Cactus does not make any distributions during 2011,but had $200,000 of ordinary income.In 2012,ordinary income was $100,000 and distributions were $100,000.What is Tex's ordinary income for 2012?

A)$0
B)$50,000
C)$100,000
D)$200,000

Question 71

Cactus Corporation,an S Corporation,had accumulated earnings and profits of $100,000 at the beginning of 2009.Tex and Shirley each own 50% of the stock and have a basis in their stock of $50,000 on January 1,2009.Cactus does not make any distributions during 2009,but had $200,000 of ordinary income.In 2010,ordinary income was $100,000 and distributions were $100,000.What is Tex's basis at January 1,2011?

A)$100,000
B)$150,000
C)$200,000
D)$250,000

Question 72

The Vanity Corporation organized and began operations in January.The corporation's ten equal shareholders elect to have Vanity taxed as an S corporation,and the election and necessary consents are filed in a timely manner.For its first tax year ended December 31,Vanity has ordinary income of $64,000 and short-term capital gains of $16,000.During the year,it distributes $30,000 in cash equally to its ten shareholders.For the year,how much income should each shareholder report and how should it be characterized?

Question 73

Train Corporation is an S corporation that is owned equally by Carlos and Diane at the beginning of the year.On April 21 (the 111th day of Train's tax year)of the current year,Carlos sells all of his Train Corporation stock to Andre.How many days will be used when computing Carlos's share of S corporation income for this year (a non-leap year),assuming that a special income allocation election is not made?

A)110
B)111
C)254
D)255

Question 74

Troy owns 50% of Dot.Com,an e-commerce company.His S corporation stock basis at the beginning of the year is $300,000.Dot.Com has not done well this year and will report an ordinary loss of $875,000.Troy's marginal tax rate for the current year is 35%.What tax issues should Troy consider with respect to the loss?

Question 75

Which one of the following special loss limitations apply to an S corporation?

A)at-risk rules
B)passive activity limitation rules
C)hobby loss rules
D)All of the above apply.

Question 76

Gofer Corporation,an S corporation,is owned equally by Mahmoud and Kwame.The corporation had long-term capital gains of $100,000 and ordinary income of $90,000 for the current year and made no distributions.What is the amount of ordinary income from S corporation activities that Mahmoud must report?

Question 77

Cook's Outlet has been an S corporation since its inception six years ago.On January 1 of the current year,the corporation's two equal shareholders,Davis and Dane,had adjusted bases of $150,000 and $175,000,respectively,for their S corporation's stock.The shareholders plan to have the corporation distribute land with a $50,000 adjusted basis and a $200,000 FMV in the current year.Ordinary income is expected to be $180,000 in the current year.What tax issues should Davis and Dane consider with respect to the distribution?

Question 78

Dilley Corporation is an electing S corporation that uses a calendar year as its tax year.On October 31,Dilley's S election is terminated because of the acquisition of stock by an ineligible stockholder.Dilley Corporation shareholder Alan is allocated an S corporation loss for the year,which cannot be used because of the basis limitation.Alan will lose the unused loss if not used by

A)December 31 of this year.
B)March 15 of next year.
C)October 31 of next year.
D)December 31 of next year.

Question 79

Can loss or credit carryforwards from a previous C corporation tax year help reduce the built-in gains tax?

Question 80

Arnie is a 50% shareholder in Energy Corporation,an S corporation.The S corporation had an $80,000 ordinary loss last year and $10,000 of ordinary income this year.Before accounting for last year's losses,Arnie's basis in his Energy stock is $32,000 and Energy owed Arnie $4,000 (an unsecured note having a basis of $4,000)at the end of last year.In addition,Energy had $100,000 of other liabilities owed to creditors other than Arnie at the end of last year.What income and loss must Arnie report on his current return as a result of owning the Energy stock (ignoring the at-risk and passive activity limitations)?