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24211_ch23_final_p001-014 - 23 S Corporations Solutions to...

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S Corporations Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 23-1 a. No. An S corporation may not own stock in an S corporation, per se. The QSub (qualified subchapter S subsidiary) rules permit one S corporation to own another corporation if it owns 100 percent of the subsidiary S corporation s stock and elects to treat the subsidiary as a QSub. The QSub combines its income and deductions with those of the parent corporation. [See p. 23-4 and § 1361(b)(2)(A).] b. Yes. When counting shareholders, stock owned by a husband and wife is treated as owned by one shareholder. This applies whether the stock is owned jointly or separately, as long as the couple is not divorced. Thus, this corporation has only 99 owners and falls below the general 100-shareholder eligibility requirement. [See p. 23-5 and § 1361(b)(3).] c. Yes, but only if the trust is one of the five types of trusts permitted as shareholders. The one most applicable in this case is the voting trust. If the trust is established to exercise voting power for the children s stock, it may hold stock in the S corporation. Each child is treated as a separate shareholder. [See p. 23-5 and § 1361(c)(2)(A).] d. Yes. The corporation may have only one class of stock issued and outstanding. Stock that is authorized but is unissued does not invalidate the election. (See p. 23-7.) e. This corporation does not exceed the 100 shareholder limit, since the family members are all treated as one shareholder. With this ownership rule, the corporation has only 71 shareholders. (See p. 23-6 and §1361(c)(1)) 23-2 a. No, an S corporation can own stock in a C corporation or QSub. [See pp. 23-5 and § 1361(b)(3).] b. No, a married couple counts as one shareholder. [See p. 23-6 and § 1361(c)(2).] c. No, estates and resident aliens are eligible shareholders. [See p. 23-4 and § 1361(c).] d. No, the two minor children will count as shareholders, but L will not. [See Example 3, p. 23-7 and § 1361(c).] e. No, as a custodian, L is ignored. f. No, since there are no owners of the preferred stock, it is unissued and is consequently acceptable. [See p. 23-7 and § 1361(c)(4).] g. No, the differences in voting rights are authorized by § 1361(c)(4). (See p. 23-7.) h. No. This corporation would exceed the 100 shareholder limit, except that the family members are treated as one shareholder. With this rule, the corporation has only 61 shareholders. (See p. 23-6 and §1361(c)(1)) 23-3 a. The termination rules do not apply in this case because an S corporation is allowed to own stock in a C corporation or QSub. [See pp. 23-4 and § 1361(c)(6).] b. The termination is effective on December 29 because there are more than 100 shareholders on that date. (See pp. 23-6 and 23-11.) 23 23-1
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c. The election will terminate when the Englishman loses his status as a resident alien. (See p. 23-12.) d. The termination is effective the date of the exchange because two classes of stock have been issued at that point. (See p. 23-12.) e. The termination could be effective on January 1 of the year of the election if the election is made within the first 2 1 = 2 months of the year; otherwise the termination is prospective (effective January 1 next year). The corporation could specify any prospective date for the termination, on or after the date
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