Question
1. LO.1 The Federal tax treatment of S corporations and partnerships is identical. Discuss the validity of this statement.
2. LO.1 Explain the major difference between an S corporation and an LLC.
3. LO.1 Explain the advantage of an S corporation over a C corporation with respect to a net operating loss.
4. LO.1 Which of these taxes applies to an S corporation?
a. Alternative minimum tax.
b. Accumulated earnings tax.
c. Personal holding company tax.
d. Michigan state corporate income tax.
5. LO.2 Which of the following are requirements to be an S corporation?
a. Limited to a maximum of 100 shareholders.
b. Has no resident alien shareholders.
c. Has only one class of stock.
d. May have no straight debt.
e. Cannot be a member of an affiliated group.
6. LO.2 The three shareholders of an S corporation have binding compensation contracts with the corporation, with one of the shareholders having excessive payments (resulting in a constructive dividend). Would this arrangement mean that the corporation has two classes of stock? Explain.
7. LO.2 One shareholder of an S corporation takes a short-term unwritten cash advance of $9,100 during the tax year. Would this arrangement create a second class of stock?
Explain.
8. LO.2 Isaac and 121 of his close friends want to form an S corporation. Isaac reasons that if he and his friends form a partnership, the partnership can then establish an S corporation and act as a single shareholder, thereby avoiding the 100 shareholder rule. Will
Isaac’s plan work? Why or why not?
9. LO.2 Which of the following can be shareholders of an S corporation?
a. Partnership.
b. Limited liability partnership.
c. Corporation.
d. Limited liability company.
e. Estate.
10. LO.2 Joey lives in North Carolina, a common law state. He is a shareholder in an S corporation.
If he marries a nonresident alien, will the S election terminate? Would your answer change if he lives in Louisiana? Explain.
11. LO.2 Which of the following can be a shareholder of an S corporation?
a. Resident alien.
b. Partnership.
c. Charitable remainder trust.
d. IRA.
e. Estate.
f. One-person LLC (disregarded entity).
12. LO.2, 11 Bob Roman, the major owner of an S corporation, approaches you for some tax planning help. He would like to exchange some real estate in a like-kind transaction under § 1031 for other real estate that may have some environmental liabilities. Prepare a letter to Bob outlining your suggestion. Bob’s address is 8411 Huron Boulevard, West
Chester, PA 19382.
13. LO.2, 3 On March 2, 2013, the two 50% shareholders of a calendar year corporation decide to elect S status. One of the shareholders, Terry, purchased her stock from a previous shareholder (a nonresident alien) on January 18, 2013. Identify any potential problems for Terry and the corporation.
14. LO.4 Caleb Samford calls you and says that his two-person S corporation was involuntarily terminated in February 2012. He asks you if they can make a new S election now, in November 2013. Draft a memo for the file outlining what you told Caleb.
15. LO.5 Indicate whether each of the following items is available to an S corporation.
a. Amortization of organizational expenditures.
b. Dividends received deduction.
c. Standard deduction.
d. Personal exemption.
e. Section 179 expense deduction.
16. LO.6 Using the categories in the following legend, classify each transaction as a plus (+) or minus (?) on Schedule M–2 of Form 1120S. An answer might look like one of these: +AAA or ?OAA.
Legend
AAA = Accumulated adjustments account
OAA = Other adjustments account
NA = No direct effect on Schedule M–2
a. Receipt of tax-exempt interest income.
b. Unreasonable compensation determined.
c. Depreciation recapture income.
d. Nontaxable life insurance proceeds.
e. Expenses related to tax-exempt securities.
f. Charitable contributions.
g. Business gifts in excess of $25.
h. Nondeductible fines and penalties.
i. Administrative expenses.
17. LO.6, 11 Collette’s S corporation has a small amount of accumulated earnings and profits (AEP), requiring the use of the more complex distribution rules. Collette’s accountant tells her that this AEP forces maintenance of the AAA figure each year. Identify relevant tax issues facing Collette.
18. LO.6, 8 Scott Tyrney owns 21% of an S corporation. He is confused with respect to the amounts of the corporate AAA and his stock basis. Write a brief memo to Scott identifying the key differences between AAA and an S corporation stock basis.
19. LO.8 For each of the following independent statements, indicate whether the transaction will increase (+), decrease (?), or have no effect (NE) on the basis of a shareholder’s stock in an S corporation.
a. Expenses related to tax-exempt income.
b. Short-term capital gain.
c. Nonseparately computed loss.
d. Section 1231 gain.
e. Depletion not in excess of basis.
f. Separately computed income.
g. Nontaxable return-of-capital distribution by the corporation.
h. Advertising expenses.
i. Business gifts in excess of $25.
j. Depreciation recapture income.
k. Dividends received by the S corporation.
l. LIFO recapture tax paid.
m. Recovery of a bad debt previously deducted.
n. Long-term capital loss.
o. Corporate distributions out of AAA. 20. LO.9 Sheila Jackson is a 50% shareholder in Washington, Inc., an S corporation. This year, Jackson’s share of the Washington loss is $100,000. Jackson has income from several other sources. Identify at least four tax issues related to the effects of the S corporation loss on Jackson’s tax return.
21. LO.1, 11 One of your clients is considering electing S status. Texas, Inc., is a six-yearold company with two equal shareholders, both of whom paid $30,000 for their stock.
Going into 2013, Texas has a $110,000 NOL carryforward from prior years. Estimated income is $40,000 for 2013 and $25,000 for each of the next three years. Should Texas make an S election for 2013? Why or why not?
22. LO.11 How can an S corporation avoid the passive investment income tax?
23. LO.11 How does the alternative minimum tax affect an S corporation? Its shareholders?
