(77).docx - 1 Assume the following S corporations and gross...

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1 Assume the following S corporations and gross receipts, passive investment income, and corporate E&P. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1. Answer a. Clarion Corp. Year Gross Receipts Passive Investment Income Corporate Earnings and Profits 1 $1,353,458 $250,000 $321,300 2 $1,230,389 $100,000 $321,300 3 $1,139,394 $300,000 $230,000 4 $1,347,039 $350,000 $100,000
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2 5 $1,500,340 $400,000 $0 Clarion Corp. will not have its S election terminated. To be terminated, it must have C corporation earnings and profits and have passive income in excess of 25 percent of its gross receipts for three consecutive years. Here Clarion meets these requirements for years 3 and 4 but not year 5 because it has no C corporation earnings and profits. Year Gross Receipts Passive Investment Income Passive Income % of Gross Receipts Corporate Earnings and Profits 1 $1,353,458 $250,000 18.47% $321,300 2 $1,230,389 $100,000 8.13% $321,300 3 $1,139,394 $300,000 26.33% $230,000 4 $1,347,039 $350,000 25.99% $100,000 5 $1,500,340 $400,000 26.66% $0 b. Chanson Corp.
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