REG12

Question 1

How do you distribute distributions between current and accumulated E & P?

Answer 1

The amount of a distribution is a dividend first to the extent of any current E&P and then to any accumulated E&P on a pro rata basis. Current E&P is allocated to each distribution based on the ratio of each distribution to the total distribution, Current E & P x (current distribution / total distributions). The remaining distribution is allocated to accumulated E&P = Current allocation - distribution.

Question 2

When is a company insolvent?

Answer 2

A debtor is solvent to the extent that the FMV assets exceeds liabilities.

Question 3

What is the penalty imposed on an S corporation for failure to file an S corporation return within 2 ½ months of the end of the tax year?

Answer 3

Under Sec. 6699, the penalty is imposed in the amount of the number of persons who were SH during any part of the year multiplied by $200 for each of up to 12 months (including a portion of one) that the return was late. As a calendar-year taxpayer,

Question 4

What defines a private exempt foundation?

Answer 4

Each domestic or foreign exempt organization is a private foundation unless it receives more than 1/3 of its support (annually) from its members and the general public, in which case it becomes a public charity.

Question 5

What % of shareholders must consent to have a corporation’s S election revoked?

Answer 5

The consent of SH who collectively hold more than 50% of the issued and outstanding stock, both voting and nonvoting.

Question 6

If a sole proprietorship converts to electing S corporation status are there built-in gain recognized?

Answer 6

Since the S corporation was a sole proprietorship prior to electing S corporation status, no built-in gain is recognized.

Question 7

What % of receipts that are from sources other than membership fees, dues, and assessments can cause losing exempt status?

Answer 7

Exempt status is lost if 35% or more of receipts are from sources other than membership fees, dues, and assessments.

Question 8

Do you add a loan to a S Corp into the at risk amount?

Answer 8

Yes, losses can be taken to the extent of the at risk amount. Basis + loan - loan repayments.

Question 9

When must a company elect S Corp Status?

Answer 9

Make the election within 2 months and 15 days of the beginning of the corporation’s tax year, the election is effective from the first day of that tax year.

Question 10

What is the tax rate for an S corporation that pays tax on built-in gains?

Answer 10

The tax rate for the built-in gains tax is defined by statute to be the highest corporate income tax rate.

Question 11

How do you figure the per day pro rate share of a loss for an S Corp?

Answer 11

Loss / 365 days. Days a SH x loss per day x % owned.

Question 12

Do interest and dividends increase the accumulated adjustments account (AAA) of an S Corp?

Answer 12

Yes

Question 13

When does an S corporation status terminate when passive investment income exceeds what %?

Answer 13

Sec. 1362(d)(3) provides that S corporation status will be terminated when passive investment income exceeds 25% of gross receipts for 3 consecutive taxable years, and the corporation has Subchapter C earnings and profits at the end of each year.

Question 14

What are separately stated income items for an S Corp?

Answer 14

Include interest income, rental income, and net LT capital gains.

Question 15

Is tax-exempt interest included in SH income?

Answer 15

No.

Question 16

An S corporation that converts from C to S status may be subject to built-in gains tax?

Answer 16

If converted after 1986, had net appreciation inherent in its assets is subject to tax of 21% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period.
For conversions made after the 2010 tax year, the recognition period is the 5-year period beginning on the date the S election became effective. The tax liability is passed through, as a loss, pro rata to its shareholders.

Question 17

When a shareholder deducts losses of an S corporation, what can be reduced?

Answer 17

Basis in the stock is decreased (but not below 0) by the amount of the deduction. When a loss is deducted in excess of the S corporation SH’s basis in the stock, the basis in debt owed to the shareholder is reduced (but not below 0). Future earnings will be used first to restore the basis in the debt and then basis in the stock.

Question 18

What type of organizations qualify for tax-exempt status?

Answer 18

Organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc.
A partnership cannot qualify.

Question 19

Do shareholders report their share of the individual gains reduced by the taxes paid by the S corporation that are attributable to built-in gains?

Answer 19

Yes, the built-in gain of an S corp is the excess of the FMV over the basis that existed on the first day of the first taxable year for which the corporation was an S corp. Any additional appreciation after that is not a built-in gain but is treated as ordinary or capital gain. SH must include in their own gross income their share of these gains of the corporation. Also, a SH must include his or her share of the built-in gain, but the amount of built-in gain is reduced by any taxes paid by the S corp.

Question 20

In an S Corp in what order are stock and loan basis reduced for operating losses?

Answer 20

Have TWO columns and reduce the stock basis to 0 first, then reduce the loan basis.

Question 21

If a SH receives a nontaxable stock dividend, does the stock basis change?

Answer 21

No. Original cost / New # of Shares = New price/share

Question 22

In a Sec. 351 transaction, what is the SH’s basis in the transferred stock equal to?

Answer 22

It equals the SH’s adjusted basis in the contributed property - boot received, money received, liabilities assumed by the corporation, and the FMV of property received, + gain recognized by the SH.

Question 23

What is 1231 property?

Answer 23

Property held for more than 1 year and includes all real or depreciable property used in a trade or business

Question 24

Does a corporation recognize gain on distributions of property?

Answer 24

Yes. The definition of property excludes stock, but only if issued by the corporation.

Question 25

A claim for refund must be filed within how long?

Answer 25

Within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. If no return was filed, the claim for refund is due within 2 years from the time the tax was paid.