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Exam 12: S Corporations

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Question 31

True/False

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The Schedule M-3 is the same for a C corporation and an S corporation.

A) True
B) False

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Question 32

Multiple Choice

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Quadrant,Inc. ,is a former C corporation whose first S corporation year began on January 1,2010.At that time,Quadrant had two assets: X,with a value of $1,000 and a basis of $400;and Y,with a value of $400 and a basis of $600.The net unrealized built-in gain as of January 1,2010,is $400 (i.e. ,X's $600 gain less Y's $200 loss) .Asset X is sold for $1,200 during 2010,and asset Y is retained.The recognized built-in gain in 2010 is:

A) $0.
B) $200.
C) $400.
D) $600.
E) None of the above.

F) D) and E)
G) B) and D)

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Question 33

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Which statement is incorrect about an S corporation?

Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?

Only 51% of the shareholders must consent to an S election.

An S corporation does not recognize a loss when distributing assets that are worth less than their basis.

Most IRAs can own stock in an S corporation.

Explain the OAA concept in S corporation taxation.

Shareholders may deduct losses in excess of the basis in S corporation stock when shareholder does not have a loan basis.

Which statement is false?

On January 2,2009,David loans his S corporation $10,000,and by the end of 2009 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2010,the company's operating income is $10,000.The company also makes distributions to David of $11,000.Which statement is correct?

The alternative minimum tax applies to an S corporation.

The debt basis always is adjusted back to the original amount before any increase is made in the stock basis.

An S shareholder's basis is increased by stock purchases and capital contributions.

Apple,Inc. ,a cash basis S corporation in Orange,Texas,formerly was a C corporation.Apple has the following assets and liabilities on January 1,2010,the date the S election is made. During 2010,Apple collects the accounts receivable and pays the accounts payable.The land is sold for $3 million,and taxable income for the year is $590,000.What is Apple's built-in gains tax?

Lott Corporation in Macon,Georgia converts to S corporation status in 2010.Lott used the LIFO inventory method in 2009 and had a LIFO inventory of $420,000 (FIFO value of $550,000) .How much tax must be added to the 2009 corporate tax liability,assuming that Lott is subject to a 35% tax rate.

Compensation for services rendered to an S corporation is not subject to FICA taxes.

Which statement is incorrect with respect to filing for an S election?

Passive investment income includes gains from the sale of securities.

All tax preference items flow through the S corporation,to be included in the shareholders' AMT calculations.