Chapter 23

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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CHAPTER 23—S CORPORATIONS TRUE/FALSE 1. Although an S corporation is taxed much like a partnership, it is subject to many of the C corporation rules. ANS: T The basic rules of corporate formation also apply to S corporations. Redemptions, liquidations, and re- organizations of an S corporation are taxed according to the rules that apply to C corporations. PTS: 1 REF: p. 11-1 2. For determining the number of shareholders in an S corporation, stock owned by a husband and wife is treated as owned by one shareholder. ANS: T Married persons are treated as one shareholder for S corporation shareholder requirement purposes. PTS: 1 REF: p. 11-5 and § 1361(c)(1) 3. P holds stock in an S corporation as custodian for her five minor children. For purposes of counting shareholders, the entire family is one shareholder. ANS: T PTS: 1 REF: Example 3 and p. 11-5 and 11-6 4. If proper elections are made, any corporation may qualify as an S corporation. ANS: F Only certain corporations may qualify as S corporations. Qualifying corporations must be (a) eligible (see p. 11-2) domestic corporations (i.e., incorporated in the United States), (b) have no more than 100 eligible shareholders (see pp. 11-3 and 11-4), and (c) have only one class of stock outstanding (see pp. 11-5 and 11-6). (Also see Examples 1 through 4 and citations in footnotes 2 through 12.) PTS: 1 5. An S corporation issues two classes of common stock: class A voting and class B nonvoting stock. The rights of both classes of stock are identical except for voting rights. The S corporation election will not be valid because more than one class of stock is outstanding. ANS: F Differences in voting rights are expressly authorized by the Code. If the rights of both classes of stock are otherwise identical, the S corporation election remains valid. PTS: 1 REF: Example 4, p. 11-6, and § 1361(c)(4) 6. Unlike partnerships, some S corporations are assessed taxes on certain types of income and/or gains. ANS: T Like partnerships, most S corporations are not assessed income taxes. However, some S corporations may pay taxes (a) on excessive passive income, (b) because of recapture of investment credit claimed by the corporation prior to the election, (c) a LIFO recapture tax, and (d) taxes on built-in gains.
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PTS: 1 REF: Examples 39 through 44 and pp. 11-46 through 11-51 7. The consent of all shareholders who have held stock during the pre-election portion of the taxable year is required in order for the election of S corporation status to be effective for that taxable year, even if the election is filed timely. ANS: T Because these shareholders will be allocated a portion of the S corporation's income, losses, and other items applicable to the time the stock was held, their consent is required. PTS:
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Chapter 23 - CHAPTER 23S CORPORATIONS TRUE/FALSE 1....

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