Chapter 11

Question 1

Which of the following is prohibited from being an S corporation shareholder? A. Foreign citizens that are U.S. residents. B. U.S. citizens. C. Corporations. D. 51 unrelated individuals. E. None of these.

Answer 1

C. Corporations.

Question 2

Which of the following is not considered a family member for purposes of the S corporation shareholder limit? A. brother. B. great-grandparent. C. grandchildren. D. grandparent. E. None of these.

Answer 2

E. None of these.

Question 3

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone’s cousins, five of Tone’s children, three of Tone’s grandchildren, and 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have? A. 90. B. 92. C. 95. D. 97. E. None of these.

Answer 3

B. 92.

Question 4

Which of the following is a requirement to be an S corporation? A. be a domestic or foreign corporation B. have only one class of stock C. have fewer than 75 shareholders D. have at least one corporate shareholder E. None of these.

Answer 4

B. have only one class of stock

Question 5

Suppose Hassell formed a C corporation, NewCorp. Inc., in 2014 with a calendar tax year and made an S election on April 14, 2014 with the consent of NewCorp. Inc.’s shareholders: Hassell, Richie Cunningham, and Arnold’s, Inc. (a C corporation). When is the S election effective? A. January 1, 2014. B. April 14, 2014. C. January 1, 2015. D. April 14, 2015. E. Never.

Answer 5

E. Never.

Question 6

J. D. formed Clampett, Inc. as a C corporation (calendar tax year) with J. D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2014, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2014, Clampett, Inc. filed an S corporation election, with J. D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election? A. January 1, 2014. B. January 1, 2015. C. January 1, 2016. D. February 28, 2015. E. Never.

Answer 6

B. January 1, 2015.

Question 7

If Annie and Andy (each a 30% shareholder) file a revocation on March 18, 2014 to terminate their S corporation’s S election, what is the effective date of the S corporation termination (assuming they do not specify one)? A. January 1, 2014. B. March 16, 2014. C. January 1, 2015. D. March 16, 2015. E. None of these.

Answer 7

C. January 1, 2015.

Question 8

Which of the following would not result in an S election termination? A. Having 120 unrelated shareholders. B. Having a corporation as a shareholder. C. Issuing a second class of stock. D. Having excess passive investment income for two consecutive years. E. None of these.

Answer 8

D. Having excess passive investment income for two consecutive years.

Question 9

On March 15, 2014, J. D. sold his Clampett, Inc. (an S corporation) shares to Ellie Mae, Inc. (a C corporation), terminating Clampett, Inc.’s S election on March 15, 2014. Absent permission from the IRS, what is the earliest date Clampett, Inc. may again elect to be taxed as an S corporation? A. January 1, 2020. B. January 1, 2019. C. January 1, 2018. D. January 1, 2017. E. January 1, 2015.

Answer 9

B. January 1, 2019.

Question 10

The IRS may consent to an early re-election of S corporation status after a termination under which of the following: A. The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination. B. The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination. C. The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders. D. The corporation had only two ineligible shareholders at the termination date. E. None of these.

Answer 10

C. The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.

Question 11

Assume Joe Harry sells his 25% interest in Joe’s S Corp. Inc. to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe’s S Corp. Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)? A. $28,000. B. $50,000. C. $112,000. D. $200,000. E. None of these.

Answer 11

A. $28,000.

Question 12

Assume Joe Harry sells his 25% interest in Joe’s S Corp. Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe’s S Corp. Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)? A. $28,000. B. $50,000. C. $112,000. D. $200,000. E. None of these.

Answer 12

B. $50,000.

Question 13

Which of the following is not a separately stated item for S corporations? A. Dividends. B. Interest income. C. Charitable contributions. D. Investment interest expense. E. All of these are separately stated items.

Answer 13

E. All of these are separately stated items.

Question 14

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa’s tax basis in Cook, Inc. after formation? A. $20,000. B. $30,000. C. $60,000. D. $80,000. E. $120,000.

Answer 14

B. $30,000.

Question 15

Which of the following is not an adjustment to an S corporation shareholder’s stock basis? A. Increase for any contributions to the S corporation during the year. B. Increase for shareholder’s share of ordinary business income. C. Decrease for shareholder’s share of nondeductible items. D. Increase for distributions during the year. E. None of these.

Answer 15

D. Increase for distributions during the year.

Question 16

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation? A. $10,000. B. $27,000. C. $37,000. D. $40,000. E. None of these.

Answer 16

C. $37,000.

Question 17

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal’s stock and debt basis at the end of the year if Jamaal is a 50% shareholder of the S corporation? A. $27,000 stock basis; 10,000 debt basis. B. $0 stock basis; $10,000 debt basis. C. $67,000 stock basis; $10,000 debt basis. D. -$13,000 stock basis; $10,000 debt basis. E. None of these.

Answer 17

E. None of these.

Question 18

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation? A. $4,000 income. B. $1,600 income. C. $1,000 loss. D. $3,400 loss. E. None of these.

Answer 18

D. $3,400 loss.

Question 19

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal’s stock and debt basis at the end of 2014? A. $0 stock basis; $4,600 debt basis. B. $0 stock basis; $9,600 debt basis. C. $4,600 stock basis; $0 debt basis. D. $9,600 stock basis; $0 debt basis. E. None of these.

Answer 19

A. $0 stock basis; $4,600 debt basis.

Question 20

Which of the following is the correct order in which loss limitation rules are applied? A. basis rules 1st, at-risk rules 2nd, passive loss rules 3rd. B. passive loss rules 1st, at-risk rules 2nd, basis rules 3rd. C. basis rules 1st, passive loss rules 2nd, at-risk rules 3rd. D. passive loss rules 1st, basis rules 2nd, at-risk rules 3rd. E. None of these.

Answer 20

A. basis rules 1st, at-risk rules 2nd, passive loss rules 3rd.

Question 21

Suppose Clampett, Inc. terminated its S election on August 28, 2014. At the end of the S corporation’s short tax year ending on August 28, J. D.’s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2015, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J. D. deduct in 2015? A. $0. B. $5,000. C. $17,000. D. $20,000. E. None of these.

Answer 21

B. $5,000.

Question 22

Suppose Clampett, Inc. terminated its S election on August 28, 2014. At the end of the S corporation’s short tax year ending on August 28, J. D.’s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2015, J. D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J. D. deduct in 2015? A. $0. B. $5,000. C. $17,000. D. $20,000. E. None of these.

Answer 22

C. $17,000.

Question 23

Which of the following is not a true statement? A. For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees. B. For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees. C. S corporation owners have a tax incentive to pay themselves a low salary. D. An S corporation shareholder’s allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes. E. None of these statements is false.

Answer 23

E. None of these statements is false.

Question 24

Which of the following income items from an S corporation is not considered investment income for purposes of the Net Investment Income tax? A. Passive income. B. Interest income. C. Dividends. D. Short-term capital gains. E. All of these are considered investment income for the Net Investment Income tax.

Answer 24

E. All of these are considered investment income for the Net Investment Income tax.

Question 25

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2014, Jamaal’s share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How much income does Jamaal report in 2014 from these transactions? A. $0. B. $4,000. C. $6,000. D. $7,000. E. None of these.

Answer 25

C. $6,000.

Question 26

Suppose at the beginning of 2014, Jamaal’s basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2014, Jamaal’s share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal’s stock and debt basis after these transactions? A. $0 stock basis; $8,000 debt basis. B. $0 stock basis; $10,000 debt basis. C. $5,000 stock basis; $10,000 debt basis. D. $5,000 stock basis; $3,000 debt basis. E. None of these.

Answer 26

B. $0 stock basis; $10,000 debt basis.

Question 27

Clampett, Inc. (an S corporation) previously operated as a C corporation. Distributions from Clampett, Inc. are deemed to be paid in the following order: A. shareholder’s remaining stock basis, prior C corporation earnings and profit, the AAA account. B. shareholder’s remaining stock basis, the AAA account, prior C corporation earnings and profit. C. prior C corporation earnings and profit, the AAA account, shareholder’s remaining stock basis. D. the AAA account, prior C corporation earnings and profit, shareholder’s remaining stock basis. E. None of these.

Answer 27

D. the AAA account, prior C corporation earnings and profit, shareholder’s remaining stock basis.

Question 28

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $30,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2015? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of these.

Answer 28

C. $20,000.

Question 29

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $45,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2015? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of these.

Answer 29

D. $10,000.

Question 30

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $30,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J. D.’s basis in his Clampett, Inc. stock after all transactions in 2015? A. $40,000. B. $30,000. C. $20,000. D. $10,000. E. None of these.

Answer 30

E. None of these.

Question 31

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $45,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J. D.’s basis in his Clampett, Inc. stock after all transactions in 2015? A. $40,000. B. $30,000. C. $20,000. D. $5,000. E. None of these.

Answer 31

D. $5,000.

Question 32

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $30,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J. D. recognize related to Clampett, Inc. in 2015? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of these.

Answer 32

D. $10,000.

Question 33

Clampett, Inc. has been an S corporation since its inception. On July 15, 2015, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2015, was $45,000. For 2015, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J. D. recognize related to Clampett, Inc. in 2015? A. $60,000. B. $50,000. C. $20,000. D. $10,000. E. None of these.

Answer 33

E. None of these.

Question 34

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend? A. $0. B. $10,000. C. $12,500. D. $15,000. E. None of these.

Answer 34

C. $12,500.

Question 35

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J. D.’s basis in the Clampett, Inc. stock after these transactions? A. $0. B. $5,000. C. $12,500. D. $15,000. E. None of these.

Answer 35

B. $5,000.

Question 36

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain? A. $0. B. $15,000. C. $27,500. D. $40,000. E. None of these.

Answer 36

B. $15,000.

Question 37

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much income does J. D. recognize this year from these transactions? A. $0. B. $10,000. C. $17,500. D. $40,000. E. None of these.

Answer 37

D. $40,000.

Question 38

Assume that at the end of 2014, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution? A. $0. B. $15,000. C. $25,000. D. $40,000. E. None of these.

Answer 38

C. $25,000.

Question 39

Assume that at the end of 2014, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution? A. $0. B. $5,000. C. $35,000. D. $40,000. E. None of these.

Answer 39

C. $35,000.

Question 40

Assume that at the end of 2014, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. What is J. D.’s stock basis after the distribution? A. $45,000. B. $50,000. C. $85,000. D. $90,000. E. None of these.

Answer 40

A. $45,000.

Question 41

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). What is Clampett, Inc.’s built-in gain or loss on January 1, 2014? A. $30,000 net built-in gain. B. $10,000 net built-in gain. C. $0 net built-in gain. D. $20,000 net built-in loss. E. None of these.

Answer 41

B. $10,000 net built-in gain.

Question 42

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35%. How much built-in gains tax does Clampett, Inc. pay in 2015? A. $10,500. B. $10,000. C. $3,500. D. $0. E. None of these.

Answer 42

C. $3,500.

Question 43

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2015? A. $10,500. B. $10,000. C. $3,500. D. $0. E. None of these.

Answer 43

D. $0.

Question 44

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 35% and that Clampett Inc.’s taxable income would have been a $50,000 loss in 2015 if it had been a C corporation. In 2016, Clampett, Inc.’s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2015? In 2016? A. $10,500 in 2015; $0 in 2016. B. $3,500 in 2015; $0 in 2016. C. $0 in 2015; $0 in 2016. D. $0 in 2015; $10,500 in 2016. E. None of these.

Answer 44

E. None of these.

Question 45

Which of the following S corporations would be subject to the excess net passive income tax? A. An S corporation that never operated as a C corporation. B. An S corporation that has previously distributed all earnings and profits from prior C corporation years. C. An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30% of its gross receipts. D. An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22% of its gross receipts. E. None of these.

Answer 45

E. None of these.

Question 46

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. What is Clampett, Inc.’s excess net passive income? A. $0. B. $25,000. C. $75,000. D. $100,000. E. None of these.

Answer 46

B. $25,000.

Question 47

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc. never operated as a C corporation and that the corporate tax rate is 35%. What is Clampett, Inc.’s excess net passive income tax? A. $0. B. $25,000. C. $75,000. D. $100,000. E. None of these.

Answer 47

A. $0.

Question 48

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc. has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 35%. What is Clampett, Inc.’s excess net passive income tax? A. $0. B. $8,750. C. $26,250. D. $35,000. E. None of these.

Answer 48

B. $8,750.

Question 49

Which of the following statements is correct? A. The LIFO recapture tax precludes an S corporation from using the LIFO method. B. The LIFO recapture tax is paid in five annual installments. C. The LIFO recapture amount increases the corporation’s adjusted basis in its inventory. D. The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years. E. None of these.

Answer 49

C. The LIFO recapture amount increases the corporation’s adjusted basis in its inventory.

Question 50

Which of the following statements is correct regarding S corporation estimated taxes? A. S corporations never pay estimated taxes. B. S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes. C. S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes. D. S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes. E. None of these.

Answer 50

B. S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes.