Ch17 Exam Questions S Corporations

Essentials of Federal Taxation, 11e (Spilker)

Chapter 17 S Corporations

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

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

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

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

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

6) Publicly traded corporations cannot be treated as S corporations.

7) To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year.

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

9) An S corporation election may be voluntarily or involuntarily terminated.

10) 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.

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

12) 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.

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

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

15) 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.

16) 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.

17) 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.

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

19) S corporations face the same restrictions as partnerships and C corporations on using the cash method of accounting.

20) An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

21) 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 30 year-end as an S corporation.

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

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

24) S corporations are not entitled to a dividends received deduction.

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

26) As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

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

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

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

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

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

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

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

34) 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.

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

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

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

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

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

40) 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.

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

42) S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders.

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

44) 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.

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

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

47) Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

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

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

50) The estimated tax payment rules for S corporations generally follow the rules for C corporations.

51) S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the 15th day of the fourth month after the S corporation's year-end.

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

A) Foreign citizens that are U.S. residents.

B) U.S. citizens.

C) C corporations.

D) 51 unrelated individuals.

E) None of the choices are correct.

53) Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

A) brother.

B) great-grandparent.

C) grandchild.

D) grandparent.

E) none of the choices are correct.

54) Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original 90 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 two close friends. According to the S corporation shareholder limit rules, how many shareholders does 2hit, Inc., have?

A) 90.

B) 92.

C) 95.

D) 97.

E) None of the choices are correct.

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

A) be a domestic or foreign corporation.

B) have only one class of stock.

C) have fewer than 75 shareholders.

D) have at least one corporate shareholder.

E) none of the choices are correct.

56) Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019. When is the S election effective?

A) January 1, 2019.

B) April 14, 2019.

C) January 1, 2020.

D) April 14, 2020.

E) Never.

57) 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, 2019, Jethro, Inc., sold all its shares to Jane Hathaway. On February 28, 2019, 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, 2019.

B) January 1, 2020.

C) January 1, 2021.

D) February 28, 2020.

E) Never.

58) If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2019, 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, 2019.

B) February 10, 2019.

C) January 1, 2020.

D) February 10, 2020.

E) None of the choices are correct.

59) If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, 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, 2019.

B) March 18, 2019.

C) January 1, 2020.

D) March 16, 2020.

E) None of the choices are correct.

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

A) Having 120 unrelated shareholders.

B) Having a C corporation as a shareholder.

C) Issuing a second class of stock.

D) Having excess passive investment income for two consecutive years.

E) None of the choices are correct.

61) On March 15, 2019, 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, 2019. Absent permission from the IRS, what is the earliest date Clampett, Inc., may again elect to be taxed as an S corporation? 

A) January 1, 2025.

B) January 1, 2024.

C) January 1, 2023.

D) January 1, 2022.

E) January 1, 2020.

62) The IRS may consent to an early reelection 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 corporation is now owned more than 60 percent by shareholders who were owners at the time of termination.

C) 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.

D) The corporation had only two ineligible shareholders at the termination date.

E) None of the choices are correct.

63) Assume Joe Harry sells his 25 percent 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) $29,000.

B) $50,000.

C) $112,000.

D) $200,000.

E) None of the choices are correct.

64) Assume Joe Harry sells his 25 percent 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) $200,000.

C) $28,000.

D) $112,000.

E) None of the choices are correct.

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

A) Dividends.

B) Interest income.

C) Charitable contributions.

D) Investment interest expense.

E) All of the choices are separately stated items.

66) 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) $60,000.

D) $80,000.

E) $120,000.

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

A) Increase for any contributions to the S corporation during the year.

B) Increase for shareholder's share of ordinary business income.

C) Decrease for shareholder's share of nondeductible items.

D) Increase for distributions during the year.

E) None of the choices are correct.

68) Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?

A) $10,000.

B) $27,000.

C) $37,000.

D) $40,000.

E) None of the choices are correct.

69) Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, 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 percent shareholder of the S corporation?

A) $27,000 stock basis; $10,000 debt basis.

B) $0 stock basis; $10,000 debt basis.

C) $67,000 stock basis; $10,000 debt basis.

D) ($13,000) stock basis; $10,000 debt basis.

E) None of the choices are correct.

70) Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

A) $4,000 income.

B) $1,600 income.

C) $1,000 loss.

D) $3,400 loss.

E) None of the choices are correct.

71) Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2019?

A) $0 stock basis; $4,600 debt basis.

B) $0 stock basis; $9,600 debt basis.

C) $4,600 stock basis; $0 debt basis.

D) $9,600 stock basis; $0 debt basis.

E) None of the choices are correct.

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

A) Basis rules  first, at-risk rules  second, passive loss rules third.

B) Passive loss rules  first, at-risk rules second, basis rules third.

C) Basis rules first, passive loss rules second, at-risk rules third.

D) Passive loss rules first, basis rules second, at-risk rules third.

E) None of the choices are correct.

73) Suppose Clampett, Inc., terminated its S election on August 28, 2019. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2020, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J.D. deduct in 2020?

A) $0.

B) $5,000.

C) $17,000.

D) $20,000.

E) None of the choices are correct.

74) Suppose Clampett, Inc., terminated its S election on August 28, 2019. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2020, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J.D. deduct in 2020?

A) $0.

B) $5,000.

C) $17,000.

D) $20,000.

E) None of the choices are correct.

75) Which of the following is not a true statement?

A) 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.

B) 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 shareholder-employees who own more than 2 percent.

C) S corporation owners have a tax incentive to pay themselves a low salary.

D) An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes.

E) None of the choices are false.

76) 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) Investment interest income.

C) Dividends.

D) Short-term capital gains.

E) All of these choices are considered investment income for the net investment income tax.

77) Suppose that at the beginning of 2019 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 2019, 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 in 2019 from these transactions?

A) $0.

B) $4,000.

C) $6,000.

D) $7,000.

E) None of the choices are correct.

78) Suppose that at the beginning of 2019 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 2019, 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; $8,000 debt basis.

B) $0 stock basis; $10,000 debt basis.

C) $5,000 stock basis; $10,000 debt basis.

D) $5,000 stock basis; $3,000 debt basis.

E) None of the choices are correct.

79) 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) Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account.

B) Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit.

C) Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis.

D) The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis.

E) None of the choices are correct.

80) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, 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 2020?

A) $60,000.

B) $50,000.

C) $20,000.

D) $10,000.

E) None of the choices are correct.

81) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, 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 2020?

A) $60,000.

B) $50,000.

C) $20,000.

D) $10,000.

E) None of the choices are correct.

82) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, 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 2020?

A) $40,000.

B) $30,000.

C) $20,000.

D) ($10,000).

E) None of the choices are correct.

83) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, 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 2020?

A) $40,000.

B) $30,000.

C) $20,000.

D) $5,000.

E) None of the choices are correct.

84) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc., in 2020?

A) $60,000.

B) $50,000.

C) $20,000.

D) $10,000.

E) None of the choices are correct.

85) Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc., in 2020? 

A) $60,000.

B) $50,000.

C) $20,000.

D) $10,000.

E) None of the choices are correct.

86) At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend?

A) $0.

B) $10,000.

C) $12,500.

D) $15,000.

E) None of the choices are correct.

87) At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Inc., stock after these transactions?

A) $0.

B) $5,000.

C) $12,500.

D) $15,000.

E) None of the choices are correct.

88) At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent 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, if any, of the distribution is taxable as a capital gain?

A) $0.

B) $15,000.

C) $27,500.

D) $40,000.

E) None of the choices are correct.

89) At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent 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?

A) $0.

B) $10,000.

C) $17,500.

D) $40,000.

E) None of the choices are correct.

90) Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Inc., stock. How much income does J.D. recognize as a result of the distribution?

A) $0.

B) $15,000.

C) $25,000.

D) $40,000.

E) None of the choices are correct.

91) Assume that at the end of 2019, 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 earnings and profits 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?

A) $0.

B) $5,000.

C) $35,000.

D) $40,000.

E) None of the choices are correct.

92) Assume that at the end of 2019, 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 earnings and profits and J.D. has a basis of $50,000 in his Clampett, Inc., stock. What is J.D.'s stock basis after the distribution?

A) $45,000.

B) $50,000.

C) $85,000.

D) $90,000.

E) None of the choices are correct.

93) Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). What is Clampett, Inc.'s built-in gain or loss on January 1, 2019?

A) $30,000 net built-in gain.

B) $10,000 net built-in gain.

C) $0 net built-in gain.

D) $20,000 net built-in loss.

E) None of the choices are correct.

94) Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent. Clampett, Inc.'s taxable income in 2020 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc., pay in 2020? 

A) $10,500.

B) $10,000.

C) $2,100.

D) $0.

E) None of the choices are correct.

95) Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett, Inc., had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc., pay in 2020?

A) $10,500.

B) $10,000.

C) $2,100.

D) $0.

E) None of the choices are correct.

96) Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2020 if it had been a C corporation. In 2021, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc., pay in 2020? In 2021?

A) $10,500 in 2020; $0 in 2021.

B) $2,100 in 2020; $0 in 2021.

C) $0 in 2020; $0 in 2021.

D) $0 in 2020; $10,500 in 2021.

E) None of the choices are correct.

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

A) An S corporation that never operated as a C corporation.

B) An S corporation that has previously distributed all earnings and profits from prior C corporation years.

C) An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30 percent of its gross receipts.

D) An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22 percent of its gross receipts.

E) None of the choices are correct.

98) Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. What is Clampett, Inc.'s excess net passive income?

A) $0.

B) $25,000.

C) $75,000.

D) $100,000.

E) None of the choices are correct.

99) Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc., never operated as a C corporation and that the corporate tax rate is 21 percent. What is Clampett, Inc.'s excess net passive income tax?

A) $0.

B) $21,000.

C) $75,000.

D) $100,000.

E) None of the choices are correct.

100) Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc., has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21 percent. Clampett, Inc.'s taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Inc.'s excess net passive income tax? 

A) $0.

B) $5,250.

C) $26,250.

D) $21,000.

E) None of the choices are correct.

101) Which of the following statements is correct?

A) The LIFO recapture tax precludes an S corporation from using the LIFO method.

B) The LIFO recapture tax is paid in five annual installments.

C) The LIFO recapture amount increases the corporation's adjusted basis in its inventory.

D) The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years.

E) None of the choices are correct.

102) 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 the choices are correct.

103) Suppose SPA Corp. was formed by Sara Inc. (a C corporation that is 100 percent owned by Sara) and Sara's friend Tyson. In exchange for 50 percent of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50 percent of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000. How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

104) Jason is one of 100 shareholders in Jace Corporation. The remaining 99 shareholders are unrelated individual U.S. residents. During the year, Jason gave several of his shares in Jace Corp. to his brother as a birthday present and to his best friend, Hal (unrelated to all shareholders in Jace Corp.), as a wedding present. After these gifts, Jace Corp. has 102 shareholders. Is Jace Corp. prohibited from electing to become an S corporation? Explain.

105) Maria, a resident of Mexico City, Mexico, formed MZE Corp. in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

106) Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. Is MZE eligible to elect S corporation status? Explain.

107) AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders, Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain. 

108) Shea is a 100 percent owner of Mets Corporation (an S corporation). Mets is a calendar-year taxpayer. On February 16, 2019, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

109) ABC Corp. elected to be taxed as an S corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

110) Neal Corporation was initially formed as a C corporation with a calendar year-end. Neal elected S corporation status, effective January 1, 2019. On December 31, 2018, Neal Corp. reported earnings and profits of $150,000. Beginning in 2019, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the termination?

111) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2019, 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 2019 as follows: (Assume that there are 365 days in the year.)

If ABC uses the daily method of allocating income between the S corporation short tax year (January 1–April 30) and the C corporation short tax year (May 1–December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2019? 

112) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2019, 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 2019 as follows: (Assume that there are 365 days in the year.)

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?

113) XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2019, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C corporation, Zach, Inc. Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

114) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2019, Bryant sold his CB shares to Don. CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.)

How much 2019 income is allocated to each shareholder if CB Corporation uses the daily method of allocating income?

115) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2019, Bryant sold his CB shares to Don. CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.)

How much 2019 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?

116) XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each 50 percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2019.

Required:

a. What amount of ordinary business income is allocated to Jane?

b. What is the amount and character of separately stated items allocated to Jane?

c. What is Jane's basis in her XYZ Corporation stock at the end of the year?

117) At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

118) Jackson is the sole owner of JJJ Corp. (an S corporation). At the beginning of 2019, Jackson's basis in his JJJ stock was $8,000. For 2019, JJJ reported a ($30,000) ordinary business loss (not a passive loss) and $4,000 of long-term capital gains. Assuming Jackson's tax basis and his at-risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2019?

119) Jackson is the sole owner of JJJ Corp. (an S corporation). At the end of 2019, Jackson's basis in his JJJ stock and his at-risk amount were $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, 2019. If Jackson contributes $6,000 cash to JJJ on July 1, 2020, and $3,000 cash on January 5, 2021, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

120) Parker is a 100 percent shareholder of Johnson Corp. (an S corporation). At the beginning of 2019, Parker's basis in his Johnson Corp. stock was $14,000. During 2019, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2020, Johnson Corp. reported $8,000 of ordinary business income.

a. How much of the $25,000 ordinary loss allocated to Parker clears the tax-basis hurdle for deductibility in 2019?

b. What is Parker's stock and debt basis at the end of 2019?

c. What is Parker's stock and debt basis at the end of 2020?

121) Lamont is a 100 percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2019. During 2020, JKL distributed $20,000 to Lamont. During 2020, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2020 in each of the following scenarios?

a. Lamont's stock basis at the beginning of 2020 was $30,000.

b. Lamont's stock basis at the beginning of 2020 was $4,000.

122) Hector formed H Corporation as a C corporation at the beginning of 2019. Hector was the sole shareholder of H Corporation. H Corporation reported 2019 taxable income (and earnings and profits) of $200,000. At the beginning of 2020, H Corporation elected S corporation status. During 2020, H Corporation had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corporation also distributed $15,000 to Hector. What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA) at the end of 2020?

123) Hazel is the sole shareholder of Maple Corp. In 2019 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2019, Maple elected S corporation status. During 2020 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2020 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

124) Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2019, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated earnings and profits from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

125) During 2019, CDE Corporation (an S corporation since its inception in 2017) distributed a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

126) During 2019, CDE Corporation (an S corporation since its inception in 2017) liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

127) During 2019, CDE Corporation (an S corporation since its inception in 2017) liquidates by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

128) MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2019. The following assets were owned by MWC on December 31, 2018.

What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2019?

129) SEC Corporation has been operating as a C corporation since 2016. It elected to become an S corporation, effective January 1, 2019. On December 31, 2018, SEC reported a net unrealized built-in gain of $60,000. In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019). At the beginning of the year, the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000. SEC sold the inventory for $35,000. If SEC had been a C corporation in 2019, its taxable income would have been $100,000. How much built-in gains tax must SEC pay in 2019?

130) SEC Corporation has been operating as a C corporation since 2016. It elected to become an S corporation, effective January 1, 2019. On December 31, 2018, SEC reported a net unrealized built-in gain of $10,000. In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2019, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2019? Assume the corporate tax rate is 21%.

131) RGD Corporation was a C corporation from its inception in 2014 through 2018. However, it elected S corporation status effective January 1, 2019. RGD had $50,000 of earnings and profits at the end of 2018. RGD reported the following information for its 2019 tax year.

What amount of excess net passive income tax is RGD liable for in 2019? Assume the corporate tax rate is 21%.

132) RGD Corporation was a C corporation from its inception in 2015 through 2018. However, it elected S corporation status effective January 1, 2019. RGD had $50,000 of earnings and profits at the end of 2018. RGD reported the following information for its 2019 tax year.

What amount of excess net passive income tax is RGD liable for in 2019? (Round your answer for excess net passive income to the nearest thousand.)

133) During 2019, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2020. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2019 its inventory basis under the LIFO method was $63,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2019 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

134) During 2019, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2020. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2019 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2019 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?