choices a and c are incorrect halls limousine used in

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Unformatted text preview: agic's corporate tax rate was 35%. What was Magic's tax liability as a result of the sale? a. b. c. d. $0 $3,500 $15,750 $19,250 CPA-05547 Explanation Choice "c" is correct. A distribution or a sale of an S corporation's assets may result in a tax on any "builtin gain" at the corporate level. An unrealized "built-in gain" results when the following two conditions occur: (1) a C corporation elects S corporation status, and (2) the fair market value of the corporate assets exceeds the adjusted basis of corporate assets on the election date. The two conditions exist in the facts of the question. The net unrealized built-in gain is the excess of the fair market value of corporate assets over the adjusted basis of corporate assets at the beginning of the year in which the S corporation status is elected. FMV at January 1 Adjusted basis at January 1 Excess Times 35% tax rate Corporate tax liability $85,000 (40,000) 45,000 35% $15,750 Note: The gain to the corporation is a total of $55,000 ($95,000 - $40,000). An S corporation generally does not pay tax at...
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This note was uploaded on 06/14/2013 for the course ACCOUNTING Regulation taught by Professor Becker during the Fall '10 term at Keller Graduate School of Management.

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