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McGraw-Hill's Taxation of Business Entities, 2012e

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Unformatted text preview: Chapter 11 - S Corporations Chapter 11 S Corporations SOLUTIONS MANUAL Discussion Questions: 1. [LO 1] In general terms, how are C corporations different from and similar to S corporations? S corporations are incorporated under state law and thus have the same legal protections as C corporations. They are governed by the same corporate tax rules that apply in the organization, liquidation, and reorganization of C corporations. However, unlike a C corporation, an S corporation is a flow-through entity and shares many tax similarities with partnerships. For example, basis calculations for S corporation shareholders and partners are similar, the income or loss of an S corporation flows through to its owners, and distributions are generally not taxed to the extent of the owner’s basis. 2. [LO 1] What are the limitations on the number and type of shareholders an S corporation may have? How are these limitations different from restrictions on the number and type of shareholders C corporations or partnerships may have? Only U.S. citizens or residents, certain trusts, and certain tax-exempt organizations may be shareholders, no corporations or partnerships. In addition, S corporations may have no more than 100 shareholders; family members and their estates count as one. C corporations and partnerships do not have a limit on the amount or type of shareholders or partners. 3. [LO 1] Why can’t large, publicly traded corporations be treated as S corporations? A publicly traded corporation could not elect S corporation status because it would not satisfy the 100 shareholder limit required of S corporations. 4. [LO 1] How do the tax laws treat family members for purposes of limiting the number of owners an S corporation may have? Family members and their estates count as one shareholder for the 100 shareholder limit. Family members include a common ancestor and her lineal descendants and their spouses 11-1 Chapter 11 - S Corporations (or former spouses). Thus, great-grandparents, grandparents, parents, children, grandchildren, great-grandchildren, and the respective spouses are family members for this purpose. 5. [LO 1] Super Corp. was organized under the laws of the state of Montana. It issued common voting stock and common nonvoting stock to its two shareholders. Is Super Corp. eligible to elect S corporation status? Why or why not? Assuming that the voting and nonvoting stock shares have equal distribution and liquidation rights, Super Corp. may elect S corporation status. While the law specifies that S corporations can have only one class of stock, differences in voting power is permitted as long as distribution and liquidation rights are identical. 6. [LO 1] Karen is the sole shareholder of a C corporation she formed last year. If she elects S corporation status this year on February 20, when will the election become effective and why? What if she had made the election on March 20?...
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Chap011SM - Chapter 11 S Corporations Chapter 11 S...

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