ch22
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ch22

Course Number: ACCOUNTING 401, Spring 2012

College/University: Regis

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ch22 Student: ___________________________________________________________________________ 1. S corporations offer the same legal protection to owners as C corporations. True False 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. True False...

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___________________________________________________________________________ 1. S ch22 Student: corporations offer the same legal protection to owners as C corporations. True False 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. True False 3. The same exact requirements for forming and contributing property govern S corporations and partnerships. True False 4. S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder. True False 5. Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights. True False 6. Publicly traded corporations cannot be treated as S corporations. True False 7. To make an S election effective as of the beginning of the current year, an S corporation must file Form 2553 within 3 months after the beginning of the year. True False 8. Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent. True False 9. An S corporation may be voluntarily or involuntarily terminated. True False 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. True False 11. Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent. True False 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. True False 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. True False 14. If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election. True False 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. True False 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. True False 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. True False 18. Like partnerships, S corporations determine their accounting periods and make accounting method elections at the entity level. True False 19. Like partnerships and C corporations, S corporations face several restrictions on using the cash method of accounting. True False 20. An S corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year end. True False 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. True False 22. S corporations have considerable flexibility in making special profit and loss allocations. True False 23. Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss). True False 24. S corporations are not entitled to a dividends received deduction. True False 25. An S corporation shareholder calculates his initial basis upon formation of the corporation like C corporation shareholders. True False 26. Like partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually. True False 27. Unlike partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero. True False 28. In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis. True False 29. S corporation shareholders are not allowed to include any S corporation debt in their stock basis. True False 30. For an S corporation shareholder to deduct it, a loss must clear three separate hurdles: (1) tax basis, (2) atrisk amount, and (3) tax-shelter rules. True False 31. Losses not deductible due to the basis rules are carried over to future years. True False 32. Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to S corporations. True False 33. An S corporation shareholder's allocable share of ordinary business income (loss) is classified as selfemployment income for tax purposes. True False 34. S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits. True False 35. For S corporations with earnings and profits from prior C corporation years, the taxation of distributions is very similar to the rules for partnerships. True False 36. For S corporations without earnings and profits from prior C corporation years, the taxation of distributions is very similar to the rules for partnerships. True False 37. Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance. True False 38. Distributions to owners may not cause the AAA to go negative or to become more negative. True False 39. 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. True False 40. When an S corporation distributes appreciated property to its shareholders, the shareholders who receive the distributed property recognize their distributive share of the deemed gain. True False 41. S corporations recognize gains and losses on distributions of property. True False 42. S corporation distributions are not taxable to the extent of stock and debt basis. True False 43. During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the corporation's AAA balance and the individual shareholder's basis in the stock. True False 44. S corporations generally recognize gain or loss on each asset they distribute in liquidation. True False 45. The built-in gains tax does not apply to S corporation that never operated as C corporations. True False 46. Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax. True False 47. S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax. True False 48. C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax. True False 49. The estimated tax rules for S corporations generally follow the rules for C corporations. True False 50. S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the fifteenth day of the fourth month after the S corporation's year end. True False 51. 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. Corporations. D. 51 unrelated individuals. E. None of the above. 52. Which of the following is not considered a family member for purposes of the S corporation shareholder limit? A. Brother. B. Great-grandparent. C. Grandchildren. D. Grandparent. E. None of the above. 53. Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and 2 close friends. For 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 above. 54. 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 above. 55. Suppose Hassell formed a C corporation, NewCorp, Inc., in 2011 with a calendar tax year and made an S election on April 14, 2011 with the consent of NewCorp. Inc.'s shareholders: Hassell, Richie Cunningham, and Arnold's, Inc (a C corporation). When is the S election effective? A. January 1, 2011. B. April 14, 2011. C. January 1, 2012. D. April 14, 2012. E. Never. 56. 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, 2011, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2011, 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, 2011. B. January 1, 2012. C. January 1, 2013. D. February 28, 2012. E. Never. 57. If Annie and Andy (each a 30% shareholder) file a revocation on February 10, 2011 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, 2011. B. February 10, 2011. C. January 1, 2012. D. February 10, 2012. E. None of the above. 58. If Annie and Andy (each a 30% shareholder) file a revocation on March 16, 2011 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, 2011. B. March 16, 2011. C. January 1, 2012. D. March 16, 2012. E. None of the above. 59. Which of the following would not result in an S election termination? A. Having 120 unrelated shareholders. B. Having a 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 above. 60. On March 15, 2011, 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, 2011. 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, 2017. B. January 1, 2016 C. January 1, 2015. D. January 1, 2014. E. January 1, 2013. 61. The IRS may consent to an early re-election of S corporation status after a termination under which of the following: A. The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination. B. The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination. CThe 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 above. 62. Assume Joe Harry sells his 25% interest in Joe's S Corp, Inc. to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp, Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)? A. $28,000. B. $50,000. C. $112,000. D. $200,000. E. None of the above. 63. Assume Joe Harry sells his 25% interest in Joe's S Corp, Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp, Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)? A. $28,000. B. $50,000. C. $112,000. D. $200,000. E. None of the above. 64. 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 above are separately stated items. 65. Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in Cook, Inc. after formation? A. $20,000. B. $30,000. C. $60,000. D. $80,000. E. $120,000. 66. 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 above. 67. Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2011, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation? A. $10,000. B. $27,000. C. $37,000. D. $40,000. E. None of the above. 68. Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2011, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50% shareholder of the S corporation? A. $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 above. 69. Suppose at the beginning of 2011, 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 a $5,000 suspended loss from the S corporation. In 2011, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% 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 above. 70. Suppose at the beginning of 2011, 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 a $5,000 suspended loss from the S corporation. In 2011, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2011? 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 above. 71. Which of the following is the correct order in which loss limitation rules are applied? A. Basis rules 1st, at-risk rules 2nd, passive loss rules 3rd. B. Passive loss rules 1st, at-risk rules 2nd, basis rules 3rd. C. Basis rules 1st, passive loss rules 2nd, at-risk rules 3rd. D. Passive loss rules 1st, basis rules 2nd, at-risk rules 3rd. E. None of the above. 72. Suppose Clampett, Inc. terminated its S election on August 28, 2011. 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 2012, 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 2012? A. $0. B. $5,000. C. $17,000. D. $20,000. E. None of the above. 73. Suppose Clampett, Inc. terminated its S election on August 28, 2011. 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 2012, 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 2012? A. $0. B. $5,000. C. $17,000. D. $20,000. E. None of the above. 74. Which of the following is not a true statement? AFor 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. BFor shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets . a tax deduction, but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees. 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 above statements is false. 75. Suppose at the beginning of 2011, 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 2011, 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 2011 from these transactions? A. $0. B. $4,000. C. $6,000. D. $7,000. E. None of the above. 76. Suppose at the beginning of 2011, 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 2011, 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 above. 77. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, 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 2012? A. $40,000. B. $30,000. C. $20,000. D. $10,000. E. None of the above. 78. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, 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 2012? A. $40,000. B. $30,000. C. $20,000. D. $5,000. E. None of the above. 79. At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $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 above. 80. Clampett, Inc. (an S corporation) previously operated as a C corporation. 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 above. 81. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, 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 2012? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of the above. 82. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, 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 2012? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of the above. 83. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, 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 2012? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of the above. 84. Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, 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 2012? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of the above. 85. At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $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 above. 86. At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, 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 above. 87. At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much income does J.D. recognize this year from these transactions? A. $0. B. $10,000. C. $17,500. D. $40,000. E. None of the above. 88. Assume that at the end of 2011, 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 E&P 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 above. 89. Assume that at the end of 2011, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J.D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J.D. recognize as a result of the distribution? A. $0. B. $5,000. C. $35,000. D. $40,000. E. None of the above. 90. Assume that at the end of 2011, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J.D. has a basis of $50,000 in his Clampett, Inc. stock. 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 above. 91. 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% 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% of its gross receipts. E. None of the above. 92. Clampett, Inc. converted to an S corporation on January 1, 2011. 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, 2011? 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 above. 93. Clampett, Inc. converted to an S corporation on January 1, 2011. 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 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35%. How much built-in gains tax does Clampett, Inc. pay in 2012? A. $10,500. B. $10,000. C. $3,500. D. $0. E. None of the above. 94. Clampett, Inc. converted to an S corporation on January 1, 2011. 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 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35% 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 2012? A. $10,500. B. $10,000. C. $3,500. D. $0. E. None of the above. 95. Clampett, Inc. converted to an S corporation on January 1, 2011. 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 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2012 if it had been a C corporation. In 2013, 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 2012? In 2013? A. $10,500 in 2012; $0 in 2013. B. $3,500 in 2012; $0 in 2013. C. $0 in 2012; $0 in 2013. D. $0 in 2012; $10,500 in 2013. E. None of the above. 96. 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 above. 97. 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 35%. What is Clampett, Inc.'s excess net passive income tax? A. $0. B. $25,000. C. $75,000. D. $100,000. E. None of the above. 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. Assume that Clampett, Inc. has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 35%. What is Clampett, Inc.'s excess net passive income tax? A. $0. B. $8,750. C. $26,250. D. $35,000. E. None of the above. 99. Which of the following statements is correct? A. LIFO The 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 above. 100.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 above. 101.Suppose SPA Corp. was formed by Sara Inc. (a C corporation that is 100% owned by Sara) and Sara's friend Tyson. In exchange for 50% of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50% 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? 102.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. 103.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. 104.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. 105.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. 106.Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2011, 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? 107.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? 108.Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2011. On December 31, 2010, Neal Corp. reported earnings and profits of $150,000. Beginning in 2011, 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? 109.ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2011, 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 2011 as follows: 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 2011? 110.ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2011, 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 2011 as follows: 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? 111.XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2011, 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? 112.CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On October 1, 2011, Bryant sold his CB shares to Don. CB reported business income for 2011 as follows: How much 2011 income is allocated to each shareholder if CB Corp. uses the daily method of allocating income? 113.CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On October 1, 2011, Bryant sold his CB shares to Don. CB reported business income for 2011 as follows: How much 2011 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? 114.XYZ Corporation (an S corporation) is owned by Jane and Rebecca who are each 50% shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2011. 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 Corp. stock at the end of the year? 115.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 onethird 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? 116.Jackson is the sole owner of JJJ Corp. (an S corporation). At the beginning of 2011, Jackson's basis in his JJJ stock was $8,000. For 2011, 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 2011? 117.Jackson is the sole owner of JJJ Corp. (an S corporation). At the end of 2011, Jackson's basis in his JJJ stock and his at risk amount was $0. Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax basis and at risk level). JJJ's S election was terminated effective the end of the day on December 31, 2011. If Jackson contributes $6,000 cash to JJJ on July 1, 2012 and $3,000 cash on January 5, 2013, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused? 118.Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2011, Parker's basis in his Johnson Corp. stock was $14,000. During 2011, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2012, 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 2011? b. What is Parker's stock and debt basis at the end of 2011? c. What is Parker's stock and debt basis at the end of 2012? 119.Lamont is a 100% owner of JKL Corporation. JKL has been an S corporation since its inception in 2011. During 2013, JKL distributed $20,000 to Lamont. During 2013, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain, if any, Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2013 in each of the following scenarios? a. Lamont's stock basis at the beginning of the year was $30,000. b. Lamont's stock basis at the beginning of the year was $4,000. 120.Hector formed H Corporation as a C corporation at the beginning of 2011. Hector was the sole shareholder of H Corporation. H Corp. reported 2011 taxable income (and earnings and profits) of $200,000. At the beginning of 2012, H Corp. elected S corporation status. During 2012, H Corp. had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corp. 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 2012? 121.Hazel is the sole shareholder of Maple Corp. In 2011 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2012, Maple elected S corporation status. During 2012 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 2012 (after accounting for the distribution) if her basis at the beginning of the year was $5,000? 122.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 2011, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P 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? 123.During 2011, CDE Corporation (an S corporation since its inception in 2009) 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? 124.During 2011, CDE Corporation (an S corporation since its inception in 2009) 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? 125.During 2011, CDE Corporation (an S corporation since its inception in 2009) 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 $30,000. 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? 126.MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2011. The following assets were owned by MWC on December 31, 2010. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2011? 127.SEC Corporation has been operating as a C corporation since 2008. It elected to become an S corporation, effective January 1, 2011. On December 31, 2010, SEC reported a net unrealized built in gain of $60,000. In addition to other transactions in 2011, SEC sold inventory it owned at the beginning of 2011 (it did not sell any other assets it owned at the beginning of 2011). 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 2011, its taxable income would have been $100,000. How much builtin gains tax must SEC pay in 2011? 128.SEC Corporation has been operating as a C corporation since 2008. It elected to become an S corporation, effective January 1, 2011. On December 31, 2010, SEC reported a net unrealized built in gain of $10,000. In addition to other transactions in 2011, SEC sold inventory it owned at the beginning of 2011 (it did not sell any other assets it owned at the beginning of 2011). 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 2011, its taxable income would have been $40,000. How much builtin gains tax must SEC pay in 2011? 129.RGD Corporation was a C corporation from its inception in 2007 through 2010. However, it elected S corporation status effective January 1, 2011. RGD had $50,000 of earnings and profits at the end of 2010. RGD reported the following information for its 2011 tax year. What amount of excess net passive income tax is RGD liable for in 2011? 130.RGD Corporation was a C corporation from its inception in 2007 through 2010. However, it elected S corporation status effective January 1, 2011. RGD had $50,000 of earnings and profits at the end of 2010. RGD reported the following information for its 2011 tax year. What amount of excess net passive income tax is RGD liable for in 2011? 131.During 2010, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2011. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2010 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 2010 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax? 132.During 2010, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2011. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2010 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 2010 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax? ch22 Key 1. TRUE 2. FALSE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. TRUE 16. FALSE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. FALSE 22. FALSE 23. FALSE 24. TRUE 25. TRUE 26. TRUE 27. FALSE 28. TRUE 29. TRUE 30. FALSE 31. TRUE 32. TRUE 33. FALSE 34. TRUE 35. FALSE 36. TRUE 37. FALSE 38. TRUE 39. TRUE 40. TRUE 41. FALSE 42. FALSE 43. FALSE 44. TRUE 45. TRUE 46. FALSE 47. TRUE 48. FALSE 49. TRUE 50. FALSE 51. C 52. E 53. B 54. B 55. E 56. B 57. A 58. C 59. D 60. B 61. C 62. A 63. B 64. E 65. B 66. D 67. C 68. E 69. D 70. A 71. A 72. B 73. C 74. E 75. C 76. B 77. E 78. D 79. B 80. D 81. C 82. D 83. D 84. E 85. C 86. B 87. D 88. C 89. C 90. A 91. E 92. B 93. C 94. D 95. E 96. B 97. A 98. B 99. C 100. B 101. $0 gain recognized. SPA is ineligible for S corporation status. Under 351, Tyson is not required to recognize any gain on his contribution (he received only stock in the exchange and he and Sara Inc. are in control of SPA after the exchange). However, because S corporations may not have C corporations as shareholders, SPA is not eligible to elect S corporation status. 102. Yes. Jace Corp. may not make an S election because it has 101 shareholders (one more than the limit). Jason's brother and Jason are counted as one shareholder but Jason's friend Hal is the 101st shareholder because he is unrelated to all of the Jace Corp. shareholders. 103. No. MZE would not be eligible for the S Corporation election because it was not organized under U.S. laws and has a shareholder that is not a U.S. resident. 104. Yes, MZE is eligible to elect S corporation status because MZE was formed under the laws of a U.S. state and its shareholder is a U.S. resident. The fact that it will do some business in a foreign country does not preclude an S corporation election. 105. No. To voluntarily terminate the S election Raymond and Ethan must own more than 50% of the AIRE corporation stock. Because together they own exactly 50% of the stock, they may not voluntarily elect to terminate the election. 106. January 1, 2011. Mets filed the election within 2 months of the beginning of the year so it is effective at the beginning of the tax year. 107. No, the excess passive investment income test does not apply to ABC in this situation because ABC has never operated as a C corporation; consequently, it does not have C corporation earnings and profits. 108. The S election is terminated at the end of 2015 due to excess passive income. Neal Corp. will become a C corporation effective January 1, 2016. The election is terminated because Neal had passive investment income in excess of 25% of its gross receipts for three consecutive years beginning in 2013 (2013 - 2015). C corporation short tax year = $490,000 ($730,000/365 days 245 days). 109. S corporation short tax year = $240,000 ($730,000/365 days 120 days). 110. S corporation short tax year, $200,000; C corporation short tax year, $530,000. 111. January 1, 2016. This is the fifth tax year after 2011, which is the year in which the termination became effective. 112. Casey is allocated $438,000 of income ($730,000 60%). Bryant is allocated $218,400 ($730,000/365 273 40%) and Don is allocated $73,600 ($730,000/365 92 40%). 113. Casey is allocated $438,000 of income ($730,000 60%). Bryant is allocated $80,000 ($200,000 40%) and Don is allocated $212,000 ($530,000 40%). Answer part c: Jane's stock basis at the end of the year is $217,000 ($40,000 + 169,000 + 4,000 + 2,500 + 1,500) 114. Answer parts a and b: See the following table for the allocations: 115. Harold's stock basis is $65,000 ($50,000 cash + $60,000 basis of land contributed - $45,000 mortgage relief). Missy's stock basis is $80,000 (this is the amount of cash she contributed). 116. Jackson's stock basis at the end of the year is $0 ($8,000 + $4,000 long-term capital gain - 12,000 ordinary business loss) and he can deduct $12,000 (his basis and at risk amounts before considering the ordinary loss) of the ordinary business loss in 2011. The remaining $18,000 loss is suspended. 117. Jackson will be allowed to deduct $6,000 of the ordinary business loss and $4,000 will expire unused. Jackson can deduct $6,000 because he created $6,000 additional stock basis in the post termination transition period that begins on January 1, 2012 and ends December 31, 2012 (the later of the extended due date of the final S corporation tax return or one year from the date of the termination). Because the $3,000 contribution is after December 31, 2012 it does not create additional basis that can absorb the suspended loss (it simply creates stock basis in his C corporation stock). Answer part c: The $8,000 of ordinary income restores a portion of his Parker's debt basis. So, at the end of 2012, Parker's stock basis is $0 and his debt basis is $17,000 ($9,000 + $8,000). 118. Answer parts a and b: All $25,000 of the ordinary loss clears the tax basis hurdle for deductibility. The first $14,000 of the loss reduces his stock basis to $0 at the end of 2011 and the remaining $11,000 reduces his debt basis to $9,000 ($20,000 - $11,000). Answer to part b: Lamont recognizes $11,000 of long-term capital gain ($4,000 basis at beginning of year + $5,000 income allocation - $20,000 distribution). The distribution in excess of basis is a long-term capital gain because the Lamont's stock in JKL is a capital asset and Lamont held the stock for more than a year. 119. Answer to part a: Lamont does not recognize any gain on the distribution and his stock basis at the end of the year is $15,000 ($30,000 initial basis + $5,000 business income allocation - $20,000 distribution). 120. Hector must recognize $15,000 of dividend income and the balance in H Corporation's AAA at the end of 2012 is ($63,000). The entire distribution is a dividend to Hector because H Corp. did not have a positive balance in its AAA account. It began the year with a zero balance. Because the current year adjustment to AAA is a net negative adjustment [($63,000) = ($0 + (70,000) loss + $4,000 dividend + $3,000 interest) ], the distribution comes before the net negative adjustment. However, because the AAA balance before the net negative adjustment is $0, the distribution does not come from AAA and is therefore entirely from E&P (there is sufficient E&P to absorb the distribution). 121. The first $12,000 of the distribution comes from Maple Corp.'s AAA and reduces the AAA balance to zero ($0 beginning balance + $12,000 income - $12,000 distribution = $0). This portion of the distribution reduces Hazel's stock basis by $12,000 but is not taxable. Her stock basis at the end of the year is $5,000 ($5,000 basis at beginning of year + $12,000 ordinary income - $12,000 of the distribution out of AAA). The remaining $13,000 of the distribution comes from Maple Corp.'s earnings and profits ($15,000 beginning balance - $13,000 distribution = $2,000 end of year balance). Hazel must recognize $13,000 of dividend income on the distribution from earnings and profits. 122. Vanessa must recognize $10,000 of dividend income. The first $35,000 of the distribution is deemed to be paid from V Corp.'s AAA and is nontaxable to Vanessa (it reduces her stock basis to $25,000). The next $10,000 is a dividend from V Corp.'s E&P. The remaining $15,000 of the distribution reduces Vanessa's stock basis and is not taxable to her. At the end of the year, Vanessa's stock basis is $10,000 ($25,000 - 15,000). 123. CDE recognizes $50,000 of gain on the distribution ($80,000 fair market value - $30,000 basis), which is allocated (and taxable) to Clark. Clark must also recognize a $20,000 long-term capital gain on the distribution because the $80,000 distribution exceeds his basis in the stock by $20,000 ($10,000 beginning stock basis + $50,000 taxable income allocated from CDE - $80,000 distribution). This excess distribution is a treated as a long-term capital gain because Clark has held his CDE stock for more than a year. Clark's stock basis in his CDE stock is $0 after accounting for the distribution. 124. CDE recognizes $30,000 of loss on the distribution ($100,000 fair market value - $130,000 basis), which is allocated (and deductible) to Clark. Clark must also recognize a $90,000 long-term capital gain on the distribution because the $100,000 distribution exceeds his basis in the stock by $90,000 ($40,000 beginning stock basis - $30,000 loss allocated from CDE - $100,000 distribution). This excess distribution is a treated as a long-term capital gain because Clark has held his CDE stock for more than a year. Clark's basis in the land is its fair market value, $100,000. 125. CDE recognizes $70,000 of gain on the distribution ($100,000 fair market value - $30,000 basis), which is allocated (and taxable) to Clark. Clark also recognizes a $10,000 long-term capital loss on the distribution because his $110,000 basis in the stock exceeds the $100,000 liquidating distribution by $10,000 ($40,000 beginning stock basis + $70,000 gain allocated from CDE - $100,000 distribution). The loss on the distribution is a treated as a long-term capital loss because Clark has held his CDE stock for more than a year. Clark's basis in the land is its fair market value, $100,000. 126. $20,000. The ($5,000) built-in loss on the inventory is netted against the $25,000 built-in gain on the land. 127. It must pay $7,000 ($20,000 35%) in built-in gain tax. SEC must pay a 35 percent tax on the least of (a) $20,000 (recognized built-in gain on inventory), (b) $60,000 (initial net unrealized gain), and (c) $100,000 (taxable income computed as if SEC was a C corporation for 2011). 128. It must pay $3,500 ($10,000 35%) in built-in gain tax. SEC must pay a 35 percent tax on the least of (a) $13,000 (recognized built-in gain on inventory), (b) $10,000 (initial net unrealized gain), and (c) $40,000 (taxable income computed as if SEC was a C corporation for 2011). Consequently, the excess net passive income tax is $10,500 = 35% $30,000. Excess net passive income is $30,000 computed as $73,000 [73,000 - (25% 172,000)]/73,000 129. $10,500 (35% $30,000). Passive investment income is $73,000 ($6,000 municipal bond interest + $42,000 interest income + $25,000 dividend income); Gross receipts of $172,000 ($99,000 consulting revenue + $6,000 municipal bond interest + 42,000 interest income + 25,000 dividend income); Expenses in producing passive investment income are $0. Consequently, the excess net passive income tax is $12,250 = 35% $35,000. Excess net passive income is $35,000 computed as $90,000 [90,000 - (25% 220,000)]/90,000 130. $12,250 (35% $35,000). Passive investment income is $90,000 ($50,000 interest income + $40,000 dividend income); Gross receipts of $220,000 ($120,000 consulting revenue + $10,000 long-term capital gains + 50,000 interest income + 40,000 dividend income); Expenses in producing passive investment income are $0. 131. MVC must pay $2,380 [($70,000 FIFO inventory basis - $63,000 LIFO inventory basis) 34 percent]. The 34 percent tax rate is the marginal rate at which the additional $7,000 of income would have been taxed in 2010 under the corporate tax rate schedule (the income increases its taxable income from $80,000 to $87,000). MVC must pay the tax in four equal installments beginning on the unextended due date of its 2010 tax return and each year thereafter (by March 15) for the following three years. Consequently, MVC must pay $595 ($2,380 25%) by March 15, 2011; $595 by March 15, 2012; $595 by March 15, 2013; and $595 by March 15, 2014. 132. MVC must pay $3,000 [($100,000 FIFO inventory basis - $80,000 LIFO inventory basis) 15 percent]. The 15 percent tax rate is the marginal rate at which the additional $20,000 of income would have been taxed in 2010 under the corporate tax rate schedule (the income increases MVC's taxable income from $5,000 to $25,000). MVC must pay the tax in four equal installments beginning on the unextended due date of its 2010 tax return and each year thereafter (by March 15) for the following three years. Consequently, MVC must pay $750 ($3,000 25%) by March 15, 2011; $750 by March 15, 2012; $750 by March 15, 2013; and $750 by March 15, 2014. ch22 Summary Category # of Questions AACSB: Analytic 19 AACSB: Reflective thinking 113 AICPA: BB Critical thinking 132 Blooms: Analyze 56 Blooms: Application 45 Blooms: Comprehension 1 Blooms: Knowledge 30 Learning Objective: 22-01 Describe the requirements and process to elect S corporation status. 18 Learning Objective: 22-02 Explain the events that terminate the S corporation election. 21 Learning Objective: 2213 03 Describe operating issues relating to S corporation accounting periods and methods; and explain income and loss allocations an d separately stated items. Learning Objective: 22-04 Explain stock-basis calculations; loss limitations; determination of self31 employment income; and fringe benefit rules that apply to S corporation shareholders. Learning Objective: 22-05 Apply the tax rules for S corporation operating distributions and liquidating distributions. 33 Learning Objective: 2222 06 Describe the taxes that apply to S corporations; estimated tax requirements; and tax return filing requirements. Level of Difficulty: Easy 35 Level of Difficulty: Hard 16 Level of Difficulty: Medium 81 Spilker - Chapter 22 132
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