Posted: October 20th, 2022

Chapter 22: S Corporations

Discussion Questions1.(LO1)In general terms, how are C corporations different from and similar to S corporations?2.(LO1)What are the limitations on the number and type of shareholders an S corporation may have? How are these limitations different from restrictions on the number and type of shareholders C corporations or partnerships may have?3.(LO1)Why can’t large, publicly traded corporations be treated as S corporations?4.(LO1)How do the tax laws treat family members for purposes of limiting the number of owners an S corporation may have?5.(LO1)Super Corp. was organized under the laws of the state of Montana. It issued common voting stock and common nonvoting stock to its two shareholders. Is Super Corp. eligible to elect S corporation status? Why or why not?6.(LO1)Karen is the sole shareholder of a C corporation she formed last year. If she elects S corporation status this year on February 20, when will the election become effective and why? What if she had made the election on March 20?7.(LO1)JB Corporation is a C corporation owned 80 percent by Jacob and 20 percent by Bauer. Jacob would like JB to make an S election but Bauer is opposed to the idea. Can JB elect to be taxed as an S corporation without Bauer’s consent? Explain.8.(LO1)In what circumstances could a calendar-year C corporation make an election on February 1, year 1, to be taxed as an S corporation in year 1 but not have the election effective until year 2?9.(LO2)Theodore, Alvin, and Simon are equal shareholders of Timeless Corp. (an S corporation). Simon wants to terminate the S election, but Theodore and Alvin disagree. Can Simon unilaterally elect to have the S election terminated? If not, what would Simon need to do to have the S election terminated?10.(LO2)Juanita is the sole shareholder of Belize Corporation (a calendar-year S corporation). She is considering revoking the S election. It is February 1, year 1. What options does Juanita have for timing the effective date of the S election revocation?11.(LO2)Describe the circumstances in which an S election may be involuntarily terminated.12.(LO2)Describe a situation in which a former C corporation that elected to be taxed as an S corporation may have its S election automatically terminated, but a similarly situated corporation that has always been taxed as an S corporation would not.13.(LO2)When a corporation’s S election is terminated mid-year, what options does the corporation have for allocating the annual income between the S corporation short year and the C corporation short year?14.(LO2)On June 1, year 1, Jasper Corporation’s S election was involuntarily terminated. What is the earliest Jasper may be taxed as an S corporation again? Are there any exceptions to the general rule? Explain.15.(LO3)Apple Union (AU), a C corporation with a March 31 year-end, uses the accrual method of accounting. If AU elects to be taxed as an S corporation, what will its year-end and method of accounting be (assuming no special elections)?16.(LO3)Compare and contrast the method of allocating income or loss to owners for partnerships and for S corporations.17.(LO3)Why must an S corporation report separately stated items to its shareholders? How is the character of a separately stated item determined? How does the S corporation report this information to each shareholder?18.(LO3)How do S corporations report dividends they receive? Are they entitled to a dividends received deduction? Why or why not?19.(LO4)Shawn receives stock in an S corporation when it is formed by contributing land with a tax basis of $50,000 and encumbered by a $20,000 mortgage. What is Shawn’s initial basis in his S corporation stock?20.(LO4)Why is a shareholder’s basis in an S corporate stock adjusted annually?21.(LO4)What adjustments are made annually to a shareholder’s basis in S corporation stock and in what order? What impact do these adjustments have on a subsequent sale of stock?22.(LO4)Can a shareholder’s basis in S corporation stock ever be adjusted to a negative number? Why or why not?23.(LO4)Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation.24.(LO4)Is a shareholder allowed to increase her basis in her S corporation stock by her share of the corporation’s liabilities, as partners are able to increase the basis of their ownership interest by their share of partnership liabilities? Explain.25.(LO4)How does a shareholder createdebt basisin an S corporation? How is debt basis similar and dissimilar to stock basis?26.(LO4)When an S corporation shareholder has suspended losses due to the tax basis or at-risk limitation, is he allowed to deduct the losses if the S corporation status is terminated? Why or why not?27.(LO4)When considering C corporations, the IRS checks to see whether salaries paid are too large. In S corporations, however, it usually must verify that salaries are large enough. Account for this difference.28.(LO4)How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?29.(LO4)If a corporation has been an S corporation since inception, describe how its operating distributions to its shareholders are taxed to the shareholders.30.(LO4)How are the tax consequences of a cash distribution different from those of a noncash property distribution to both the corporation and the shareholders?31.(LO5)What role does debt basis play in determining the taxability of operating distributions to shareholders?32.(LO5)What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?33.(LO5)If an S corporation with accumulated E&P makes a distribution, from what accounts (and in what order) is the distribution deemed to be paid from?34.(LO5)Under what circumstances could a corporation with earnings and profits make a tax-free distribution to its shareholders after the S election termination?35.(LO5)How do the tax consequences of S corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels?36.(LO6)When is an S corporation required to pay a built-in gains tax?37.(LO6)When is an S corporation required to pay the excess net passive income tax?38.(LO6)Is the LIFO recapture tax a C corporation tax or an S corporation tax? Explain.39.(LO6)When must an S corporation make estimated tax payments?40.(LO6)On what form does an S corporation report its income to the IRS? When is the tax return due? What information does the S corporation provide to shareholders to allow them to complete their tax returns?41.(LO6)Compare and contrast S corporations, C corporations, and partnerships in terms of tax consequences at formation, shareholder restrictions, income allocation, basis calculations, compensation to owners, taxation of distributions, and accounting periods.Problems42.(LO1)Julie wants to create an S corporation called J’s Dance Shoes (JDS). Describe how the items below affect her eligibility for an S election.Because Julie wants all her shareholders to have an equal say in the future of JDS, she gives them equal voting rights and decides shareholders who take a more active role in the firm will have priority in terms of distribution and liquidation rights.Julie decides to incorporate under the state laws of Utah, since that is where she lives. Once she gets her business up and running, however, she plans on doing extensive business in Mexico.43.(LO1)Lucy and Ricky Ricardo live in Los Angeles, California. After they were married, they started a business named ILL Corporation (a C corporation). For state law purposes, the shares of stock in ILL Corp. are listed under Ricky’s name only. Ricky signed the Form 2553 electing to have ILL taxed as an S corporation for federal income tax purposes but Lucy did not sign. Given that California is a community property state, is the S election for ILL Corp. valid?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>44.(LO1)Jane has been operating Mansfield Park as a C corporation and decides she would like to make an S election. What is the earliest the election will become effective under each of these alternative scenarios?Jane is on top of things and makes the election on January 1, 2009.Jane is mostly on top of things and makes the election on January 15, 2009.Jane makes the election on February 10, 2009. She needed a little time to convince a C corporation shareholder to sell its stock to a qualifying shareholder. That process took all of January, and she was glad to have it over with.Jane makes the election on March 14, 2009.Jane makes the election on February 5, 2009. One of the shareholders refused to consent to the S election. He has since sold his shares (on January 15, 2009) to another shareholder who approved the idea. But he never did consent to the election,45.(LO2)Missy is one of 100 unrelated shareholders of Dalmatian, an S corporation. She is considering selling her shares. Under the following alternative scenarios, would the S election be terminated? Why or why not?Missy wants to sell half her shares to a friend, a U.S. citizen, so they can rename their corporation 101 Dalmatians.Missy’s mother’s family wants to be involved with the corporation. Missy splits half her shares evenly among her aunt, uncle, grandfather, and two cousins.Missy sells half her Dalmatian stock to her husband’s corporation.46.(LO2)Cathy, Heathcliff, and Isabelle are equal shareholders in Wuthering Heights (WH), an S corporation. Heathcliff has decided he would like to terminate the S election. In the following alternative scenarios, indicate whether the termination will occur and indicate the date if applicable (assume no alternative termination dates are selected).Cathy and Isabelle both decline to agree to the termination. Heathcliff files the termination election anyway on March 14, 2009.Isabelle agrees with the termination, but Cathy strongly disagrees. The termination is filed on February 16, 2009.The termination seems to be the first thing all three could agree on. They file the election to terminate on March 28, 2009.The termination seems to be the first thing all three could agree on. They file the election to terminate on February 28, 2009.Knowing the other two disagree with the termination, on March 16, 2009, Heathcliff sells one of his 50 shares to his maid, who recently moved back to Bulgaria, her home country.47.(LO2)Assume the following S corporations and gross receipts, passive investment income, and corporate E&P. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1.Clarion Corp.YearGross ReceiptsPassive Investment IncomeCorporate Earnings and Profits1$1,353,458$250,000$321,3002$1,230,389$100,000$321,3003$1,139,394$300,000$230,0004$1,347,039$350,000$100,0005$1,500,340$400,000$ 0Chanson Corp.YearGross ReceiptsPassive Investment IncomeCorporate Earnings and Profits1$1,430,000$247,000$138,0392$ 700,380$200,000$100,0003$ 849,000$190,000$100,0004$ 830,000$210,000$ 80,0005$1,000,385$257,390$ 80,000Caillou Corp.YearGross ReceiptsPassive Investment IncomeCorporate Earnings and Profits1$1,000,458$250,000$02$ 703,000$300,480$03$ 800,375$400,370$04$ 900,370$350,470$05$ 670,000$290,377$0Colline Corp.YearGross ReceiptsPassive Investment IncomeCorporate Earnings and Profits1$1,100,370$250,000$5002$ 998,000$240,000$4003$ 800,350$230,000$3004$ 803,000$214,570$2005$ 750,000$200,000$10048.(LO2)Hughie, Dewey, and Louie are equal shareholders in HDL, an S corporation. HDL’s S election terminates under each of the following alternative scenarios. When is the earliest it can again operate as an S corporation?The S election terminates on August 1, year 2, because Louie sells half his shares to his uncle Walt, a citizen and resident of Scotland.The S election terminates effective January 1, year 3, because on August 1, year 2, Hughie and Dewey vote (2 to 1) to terminate the election.49.(LO3)Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In the conditions listed below, how much income should each report from SleepEZ for 2009 under both the daily allocation and the specific identification allocation method? Refer to the following table for the timing of SleepEZ’s income.PeriodIncomeJanuary 1 through March 15 (74 days)$125,000March 16 through December 31 (291 days)345,500January 1 through December 31, year 3 (365 days)$470,500There are no sales of SleepEZ stock during the year.On March 15, 2009, Blinkin sells his shares to Nod.On March 15, 2009, Winkin and Nod each sell their shares to Blinkin.Use the following information to completeproblems 50and51:UpAHill Corporation (an S Corporation)Income StatementDecember 31, Year 1 and Year 2Year 1Year 2Sales revenue$175,000$310,000Cost of goods sold(60,000)(85,000)Salary to owners Jack and Jill(40,000)(50,000)Employee wages(15,000)(20,000)Depreciation expense(10,000)(15,000)Miscellaneous expenses(7,500)(9,000)Interest income2,0002,500Dividend income5001,000Overall net income$ 45,000$134,50050.(LO3)Jack and Jill are owners of UpAHill, an S corporation. They own 25 and 75 percent, respectively.What amount of ordinary income and separately stated items are allocated to them for years 1 and 2 based on the information above?Complete UpAHill’s Form 1120S, Schedule K, for year 1.Complete Jill’s 1120S, Schedule K-1, for year 1.51.(LO3, LO4)Assume Jack and Jill, 25 and 75 percent shareholders in UpAHill corporation, have tax bases in their shares at the beginning of year 1 of $24,000 and $56,000, respectively. Also assume no distributions were made. Given the income statement above, what are their tax bases in their shares at the end of year 1?52.(LO4)Harry, Hermione, and Ron formed an S corporation called Bumblebore. Harry and Hermione both contributed cash of $25,000 to get things started. Ron was a bit short on cash but had a parcel of land valued at $60,000 (basis of $50,000) that he decided to contribute. The land was encumbered by a $35,000 mortgage. What tax bases will each of the three have in his or her stock of Bumblebore?53.(LO4)Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). If her stock basis is $10,000 at the beginning of the year, how much of this loss clears the hurdle for deductibility (assume at-risk limitation equals the tax basis limitation)? If she cannot deduct the whole loss, what happens to the remainder? Is she able to deduct her entire loss if she sells her stock at year-end?54.(LO4)Assume the same facts as in the previous problem, except that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. What amount is Jessica allowed to deduct in year 1? What are her stock and debt bases in the corporation at the end of year 1? What are her stock and debt bases in the corporation at the end of year 2?55.(LO4)Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $5,000. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $25,000 business loss. What amount of the loss clears the tax basis limitation, and what is James’s basis in his Birch Corp. stock and Birch Corp. debt in each of the following alternative scenarios?At the beginning of the year, James’s basis in his Birch Corp. stock was $45,000 and his basis in his Birch Corp. debt was $5,000.At the beginning of the year, James’s basis in his Birch Corp. stock was $8,000 and his basis in his Birch Corp. debt was $5,000.At the beginning of the year, James’s basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $5,000.56.(LO4)Timo is the sole owner of Jazz Inc., an S corporation. On October 31, 2009, Timo executed an unsecured demand promissory note of $15,000 and he transferred the note to Jazz (Jazz could require Timo to pay it $15,000 on demand). When Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero. On January 31, 2010, Timo paid the $15,000 to Jazz as required by the promissory note. For the taxable year ending December 31, 2009, Jazz incurred a business loss of $12,000. How much of the loss clears the stock and debt basis hurdles for deductibility?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>57.(LO4)Chandra was the sole shareholder of Pet Emporium that was originally formed as an S corporation. When Pet Emporium terminated its S election on August 31, 2008, Chandra had a stock basis and an at-risk amount of zero. Chandra also had a suspended loss from Pet Emporium of $9,000. What amount of the suspended loss is Chandra allowed to deduct and what is her basis in her Pet Emporium stock at the end of the post-termination transition period under the following alternative scenarios (assume Pet Emporium files for an extension to file its tax returns)?Chandra makes capital contributions of $7,000 on August 30, 2009, and $4,000 on September 14, 2009.Chandra makes capital contributions of $5,000 on September 1, 2009, and $5,000 on September 30, 2009.Chandra makes a capital contribution of $10,000 on August 31, 2009.Chandra makes a capital contribution of $10,000 on October 1, 2009.58.(LO4)Neil owns stock in two S corporations, Blue and Green. He actively participates in the management of Blue but maintains ownership in Green only as a passive investor. Neil has no other business investments. Both Blue and Green anticipate a loss this year, and Neil’s basis in his stock of both corporations is zero. All else equal, if Neil plans on making a capital contribution to at least one of the corporations this year, to which firm should he contribute in order to increase his chances of deducting the loss allocated to him from the entity? Why?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>59.(LO4)In the past several years, Shakira had loaned money to Shakira Inc. (an S corporation) to help the corporation keep afloat in a downturn. Her stock basis in the S corporation is now zero, and she had deducted $40,000 in losses that reduced her debt basis from $100,000 to $60,000. Things appear to be turning around this year, and Shakira Inc. repaid Shakira $20,000 of the $100,000 outstanding loan. What is Shakira’s income, if any, on the partial loan repayment?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>60.(LO4)Adam Fleeman, a skilled carpenter, started a home improvement business with Tom Collins, a master plumber. Adam and Tom are concerned about the payroll taxes they will have to pay. Assume they form an S corporation and each earns a salary of $80,000 from the corporation; in addition, they expect their share of business profits to be $60,000 each. How much Social Security tax and Medicare tax (or self-employment tax) will Adam, Tom, and their corporation have to pay on their salary and profits?61.(LO4)Using the facts inproblem 60, could Adam and Tom lower their payroll tax exposure if they operated their business as a partnership? Why or why not?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>62.(LO4)Friends Jackie (0.5 percent owner), Jermaine (1 percent owner), Marlon (2 percent owner), Michael (86 percent owner), and Tito (10.5 percent owner) are shareholders in Jackson 5 Inc. (an S corporation). As employees of the company, they each receive health insurance ($10,000 per year benefit), dental insurance ($2,000 per year benefit), and free access to a workout facility located at company headquarters ($500 per year benefit). What are the tax consequences of these benefits for each shareholder and for Jackson 5 Inc.?63.(LO5)Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Brady, who immediately elected S corporation status. On December 31 of the current year, Maple distributed $30,000 cash to Brady. What is the amount and character of gain Brady must recognize on the distribution in each of the following alternative scenarios?At the time of the distribution, Brady’s basis in his Maple Corp. stock was $35,000.At the time of the distribution, Brady’s basis in his Maple Corp. stock was $8,000.At the time of the distribution, Brady’s basis in his Maple Corp. stock was $0.64.(LO5)Oak Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Glover, and has always operated as a C corporation. However, at the beginning of this year, Glover made a qualifying S election for Oak Corp., effective January 1. Oak Corp. did not have any C corporation earnings and profits on that date. On June 1, Oak Corp. distributed $15,000 to Glover. What is the amount and character of gain Glover must recognize on the distribution, and what is his basis in his Oak Corp. stock in each of the following alternative scenarios?At the time of the distribution, Glover’s basis in his Oak Corp. stock was $35,000.At the time of the distribution, Glover’s basis in his Oak Corp. stock was $8,000.At the time of the distribution, Glover’s basis in his Oak Corp. stock was $0.65.(LO5)Janna has a tax basis of $15,000 in her Mimikaki stock (Mimikaki has been an S corporation since inception). In 2009, Janna was allocated $20,000 of ordinary income from Mimikaki. What is the amount and character of gain she recognizes from end of the year distributions in each of the following alternative scenarios, and what is her stock basis following each distribution?Mimikaki distributes $10,000 to Janna.Mimikaki distributes $20,000 to Janna.Mimikaki distributes $30,000 to Janna.Mimikaki distributes $40,000 to Janna.66.(LO5)Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstone’s earnings and profits at the end of year 1 were $10,000. Marcus is Johnstone’s sole shareholder. What is Johnstone’s accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios?Johnstone CorporationIncome StatementDecember 31, Year 2Year 2 (S Corporation)Sales revenue$150,000Cost of goods sold(35,000)Salary to owners(60,000)Employee wages(50,000)Depreciation expense(4,000)Miscellaneous expenses(4,000)Interest income10,000Overall Net Income$ 7,000Johnstone distributed $6,000 to Marcus in year 2.Johnstone distributed $10,000 to Marcus in year 2.Johnstone distributed $16,000 to Marcus in year 2.Johnstone distributed $26,000 to Marcus in year 2.67.(LO5)At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $15,000 and accumulated E&P of $20,000 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $20,000 distribution (the remaining shareholders received $30,000 in distributions). What is the amount and character of gain Nicolette must recognize from the distribution? What is her basis in her Bombay stock at the end of the year (assume her stock basis is $40,000 after considering her share of Bombay’s income for the year but before considering the effects of the distribution)?68.(LO5)Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation. However, at the beginning of this year, Connor made a qualifying S election for Pine Corp., effective January 1. Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election. This year (its first S corporation year), Pine reported business income of $50,000. Connor’s basis in his Pine Corp. stock at the beginning of the year was $15,000. What is the amount and character of gain Connor must recognize on the following alternative distributions, and what is his basis in his Pine Corp. stock at the end of the year?Connor received a $40,000 distribution from Pine Corp. at the end of the year.Connor received a $60,000 distribution from Pine Corp. at the end of the year.Connor received a $130,000 distribution from Pine Corp. at the end of the year.Connor received a $150,000 distribution from Pine Corp. at the end of the year.69.(LO5)Carolina Corporation, an S corporation, has no corporate E&P from its years as a C corporation. At the end of the year, it distributes a small parcel of land to its sole shareholder, Shadiya. The fair market value of the parcel is $70,000 and its tax basis is $40,000. Shadiya’s basis in her stock is $14,000. Assume Carolina Corporation reported zero taxable income before considering the tax consequences of the distribution.What amount of gain or loss, if any, does Carolina Corporation recognize on the distribution?How much gain must Shadiya recognize (if any) as a result of the distribution, what is her basis in her Carolina Corporation stock after the distribution, and what is her basis in the land?What is your answer to (a) if the fair market value of the land is $25,000 rather than $70,000?What is your answer to (b) if the fair market value of the land is $25,000 rather than $70,000?70.(LO5)Last year, Miley decided to terminate the S corporation election of her solely owned corporation on October 17, 2008 (effective immediately), in preparation for taking it public. At the time of the election, the corporation had an accumulated adjustments account balance of $150,000 and $450,000 of accumulated E&P from prior C corporation years, and Miley had a basis in her S corporation stock of $135,000. During 2009, Miley’s corporation reported $0 taxable income or loss. Also, during 2009 the corporation made distributions to Miley of $80,000 and $60,000. How are these distributions taxed to Miley assuming the following?Both distributions are in cash, and the first was paid on June 15 and the second on November 15.Both distributions are in cash, and the first was paid on June 15 and the second on September 30.The same facts in (b) except the June 15 distribution was a property (noncash) distribution (fair market value of distributed property equal to basis).71.(LO6)Rivendell Corporation uses the accrual method of accounting and has the following assets as of the end of 2008. Rivendell converted to an S corporation on January 1, 2009.AssetAdjusted BasisFMVCash$ 40,000$ 40,000Accounts receivable30,00030,000Inventory130,00060,000Land100,000125,000Totals$300,000$255,000What is Rivendell’s net unrealized built-in gain at the time it converted to an S corporation?Assuming the land was valued at $200,000, what would be Rivendell’s net unrealized gain at the time it converted to an S corporation?Assuming the original land value but that the inventory was valued at $85,000, what would be Rivendell’s net unrealized gain at the time it converted to an S corporation?72.(LO6)Virginia Corporation is a calendar-year corporation. At the beginning of 2009, its election to be taxed as an S corporation became effective. Virginia Corp.’s balance sheet at the end of 2008 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation).AssetAdjusted BasisFMVCash$ 20,000$ 20,000Accounts receivable40,00040,000Inventory90,000200,000Land150,000175,000Totals$300,000$435,000In 2009, Virginia reported business income of $50,000 (this would have been its taxable income if it were still a C corporation). What is Virginia’s built-in gains tax in each of the following alternative scenarios?During 2009, Virginia sold inventory it owned at the beginning of the year for $100,000. The basis of the inventory sold was $55,000.Assume the same facts as (a), except Virginia had a net operating loss carryover of $24,000 from its time as a C corporation.Assume the same facts as (a), except that if Virginia were a C corporation, its taxable income would have been $1,500.73.(LO6)Tempe Corporation is a calendar-year corporation. At the beginning of 2009, its election to be taxed as an S corporation became effective. Tempe Corp.’s balance sheet at the end of 2008 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation):AssetAdjusted BasisFMVCash$ 20,000$ 20,000Accounts receivable40,00040,000Inventory160,000200,000Land150,000120,000Totals$370,000$380,000Tempe’s business income for the year was $40,000 (this would have been its taxable income if it were a C corporation).During 2009, Tempe sold all of the inventory it owned at the beginning of the year for $210,000. What is its built-in gains tax in 2009?Assume the same facts as in (a), except that if Tempe were a C corporation, its taxable income would have been $7,000. What is its built-in gains tax in 2009?Assume the original facts. except the land was valued at $140,000 instead of $120,000. What is Tempe’s built-in gains tax in 2009?74.(LO6)Wood Corporation was a C corporation in 2008 but elected to be taxed as an S corporation in 2009. At the end of 2008, its earnings and profits were $15,500. The following table reports Wood’s (taxable) income for 2009 (its first year as an S corporation).Wood CorporationIncome StatementDecember 31, 2009Sales revenue$150,000Cost of goods sold(35,000)Salary to owners(60,000)Employee wages(50,000)Depreciation expense(4,000)Miscellaneous expenses(4,000)Interest income8,000Dividend income2,000Overall net income$ 7,000What is Wood Corporation’s excess net passive income tax for 2009?75.(LO6)Calculate Anaheim Corporation’s excess net passive income tax in each of the following alternative scenarios:Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $30,000.Passive investment income, $100,000; expenses associated with passive investment income, $70,000; gross receipts, $120,000; taxable income if C corporation, $1,200; corporate E&P, $30,000.Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $0.76.(LO5, LO6)Mark is the sole shareholder of Tex Corporation. Mark first formed Tex as a C corporation. However, in an attempt to avoid having Tex’s income double taxed, Mark elected S corporation status for Tex several years ago. On December 31, 2009, Tex reports $5,000 of earnings and profits from its years as a C corporation and $50,000 in its accumulated adjustments account from its activities as an S corporation (including its 2009 activities). Mark discovered that for the first time Tex was going to have to pay the excess net passive income tax. Mark wanted to avoid having to pay the tax but he determined the only way to avoid the tax was to eliminate Tex’s E&P by the end of 2009. He determined that, because of the distribution ordering rules (AAA first), he would need to have Tex immediately (in 2009) distribute $55,000 to him. This would clear out Tex’s accumulated adjustments account first and then eliminate Tex’s C corporation earnings and profits in time to avoid the excess net passive income tax. Mark was not sure Tex c

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