Chapter 22 S Corporations

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Problems
24. LO.5, 6 The profit and loss statement of Kitsch Ltd., an S corporation, shows $100,000 book income. Kitsch is owned equally by four shareholders.
From supplemental data, you obtain the following information about items that are included in book income.
Selling expenses ($21,200)
Tax-exempt interest income 3,000
Dividends received 9,000 § 1231 gain 7,000
Depreciation recapture income 11,000
Recovery of bad debts previously deducted 5,000
Long-term capital loss (6,000)
Salary paid to owners (each) (12,000)
Cost of goods sold (91,000)
a. Compute Kitsch’s nonseparately stated income or loss for the tax year.
b. What would be the share of this year’s nonseparately stated income or loss items for James Billings, one of the Kitsch shareholders?
25. LO.5, 6 Maul, Inc., a calendar year S corporation, incurred the following items.
Tax-exempt interest income $ 7,000
Sales 140,000
Depreciation recapture income 12,000
Long-term capital gain 20,000 § 1231 gain 7,000
Cost of goods sold (42,000)
Administrative expenses (15,000)
Depreciation expense (MACRS) (17,000)
Charitable contributions (7,000)
a. Calculate Maul’s nonseparately computed income or loss.
b. If Carl is a 40% owner of Maul, Inc., what is his share of the long-term capital gain?
26. LO.5, 6 Zebra, Inc., a calendar year S corporation, incurred the following items this year. Sammy is a 40% Zebra shareholder throughout the year.
Operating income $100,000
Cost of goods sold (40,000)
Depreciation expense (MACRS) (10,000)
Administrative expenses (5,000) § 1231 gain 21,000
Depreciation recapture income 25,000
Short-term capital loss from stock sale (6,000)
Long-term capital loss from stock sale (4,000)
Long-term capital gain from stock sale 15,000
Charitable contributions (4,500)
a. Calculate Sammy’s share of Zebra’s nonseparately computed income or loss.
b. Calculate Sammy’s share of any Zebra long-term capital gain.
27. LO.6, 8, 9 Mary is a shareholder in CarrollCo, a calendar year S corporation. At the beginning of the year, her stock basis is $10,000, her share of the AAA is $2,000, and her share of corporate AEP is $6,000.
At the end of the year, Mary receives from CarrollCo a $6,000 cash distribution.
Mary’s share of S corporation items includes a $2,000 long-term capital gain and a $10,000 ordinary loss. Determine the effects of these events on Mary’s share of the entity’s AAA, her stock basis, and CarrollCo’s AEP.
28. LO.6 On January 1, Kinney, Inc., an S corporation, reports $4,000 of accumulated
E & P and a balance of $10,000 in AAA. Kinney has two shareholders,
Erin and Frank, each of whom owns 500 shares of Kinney’s stock. Kinney’s nonseparately stated ordinary income for the year is $5,000.
Kinney distributes $6,000 to each shareholder on July 1, and it distributes another $3,000 to each shareholder on December 21. How are the shareholders taxed on the distributions?
29. LO.5, 6 McLin, Inc., is a calendar year S corporation. Its AAA balance is zero.
a. McLin holds $90,000 of AEP. Tobias, the sole shareholder, has an adjusted basis of $80,000 in his stock. Determine the tax aspects if a $90,000 salary is paid to
Tobias.
b. Same as part (a), except that McLin pays Tobias a $90,000 cash distribution from
AEP.
30. LO.6, 7, 8 Tiger, Inc., a calendar year S corporation, is owned equally by four shareholders: Ann, Becky, Chris, and David. Tiger owns investment land that was purchased for $160,000 four years ago. On September 14, when the land is worth $240,000, it is distributed to David. Assuming that David’s basis in his
S corporation stock is $270,000 on the distribution date, discuss any Federal income tax ramifications.
31. LO.6, 11 During the year, Wheel, a calendar year S corporation in Stillwater, Oklahoma, generates the following AMT items: a positive adjustment of $66,000 for mining exploration costs, an excess depletion tax preference of $96,000, and a positive certified pollution control facility adjustment of $36,000. The firm’s positive ACE adjustment is $102,000. If Pam Epstein is a one-third Wheel shareholder, what effect do these items have on her individual tax return?
32. LO.6, 8, 9, 11 Spence, Inc., a calendar year S corporation, generates an ordinary loss of $110,000 and makes a distribution of $140,000 to its sole shareholder, Storm Nelson. Nelson’s stock basis and AAA at the beginning of the year are $200,000. Write a memo to your senior manager, Aaron McMullin, discussing the tax treatment of Spence’s activities.
33. LO.6 Lonergan, Inc., a calendar year S corporation in Athens, Georgia, had a balance in AAA of $200,000 and AEP of $110,000 on December 31, 2016. During
2017, Lonergan, Inc., distributes $140,000 to its shareholders, while sustaining an ordinary loss of $120,000. Calculate the balance in Lonergan’s AAA and AEP accounts at the end of 2017.
34. LO.6 If the beginning balance in Swan, Inc.’s OAA is $6,700 and the following transactions occur, what is Swan’s ending OAA balance?
Depreciation recapture income $ 21,600
Payroll tax penalty (4,200)
Tax-exempt interest income 4,012
Nontaxable life insurance proceeds 100,000
Life insurance premiums paid (nondeductible) (3,007)
35. LO.6, 8 Cougar, Inc., is a calendar year S corporation. Cougar’s Form 1120S shows nonseparately stated ordinary income of $80,000 for the year. Johnny owns 40% of the Cougar stock throughout the year. The following information is obtained from the corporate records.
Tax-exempt interest income $ 3,000
Salary paid to Johnny (52,000)
Charitable contributions (6,000)
Dividends received from a non-U.S. corporation 5,000
Short-term capital loss (6,000)
Depreciation recapture income 11,000
Refund of prior state income taxes 5,000
Cost of goods sold (72,000)
Long-term capital loss (7,000)
Administrative expenses (18,000)
Long-term capital gain 14,000
Selling expenses (11,000)
Johnny’s beginning stock basis $ 32,000
Johnny’s additional stock purchases 9,000
Beginning AAA 31,000
Johnny’s loan to corporation 20,000
a. Compute Cougar’s book income or loss.
b. Compute Johnny’s ending stock basis.
c. Calculate Cougar’s ending AAA balance.
36. LO.6, 7, 8 Money, Inc., a calendar year S corporation in Denton, Texas, has two unrelated shareholders, each owning 50% of the stock. Both shareholders have a $400,000 stock basis as of January 1. At the beginning of the tax year, Money reports balances in AAA of $300,000 and AEP of $600,000. During the year, Money generates operating income of $100,000. At the end of the year, Money distributes securities worth $1 million, with an adjusted basis of $800,000. Determine the Federal income tax effects of these transactions.
37. LO.6, 7, 8 Assume the same facts as in Problem 36, except that the two shareholders consent to an AAA bypass election.
38. LO.8, 9 At the beginning of the tax year, Lizzie holds a $10,000 stock basis as the sole shareholder of Spike, Inc., an S corporation. During the year, Spike reports the following. Determine Lizzie’s stock basis at the end of the year and the treatment of her cash distribution.
Net taxable income from sales $ 25,000
Net short-term capital loss (18,000)
Cash distribution to Lizzie, 12/31 15,000
39. LO.8, 9 Assume the same facts as in Problem 38, except that the cash distribution to Lizzie amounts to $40,000. Determine Lizzie’s stock basis at the end of the year and the treatment of her cash distribution.
40. LO.8 Jeff, a 52% owner of an S corporation, has a stock basis of zero at the beginning of the year. Jeff’s basis in a $10,000 loan made to the corporation and evidenced by a corporate note has been reduced to zero by pass-through losses.
During the year, his net share of the corporate taxable income is $11,000. At the end of the year, Jeff receives a $15,000 cash distribution. Discuss the tax effects of the distribution.
41. LO.8 Assume the same facts as in Problem 40, except that there is no cash distribution, but the corporation repays the loan principal to Jeff. Discuss the tax effects.
42. LO.8 Assume the same facts as in Problem 40, except that Jeff’s share of corporate taxable income is only $8,000 and there is no cash distribution. However, the corporation repays the $10,000 loan principal to Jeff. Discuss the tax effects. Assume that there was no corporate note (i.e., only an account payable). Does this change your answer? Explain.
43. LO.9 Maple, Inc., is an S corporation with a single shareholder, Bob Maple. Bob believes that his stock basis in the entity is $50,000, but he has lost some of the records to substantiate this amount. Maple reports an ordinary loss for the year of $80,000. What are the Federal income tax aspects to consider?
44. LO.6, 9 At the beginning of the year, Ann and Becky own equally all of the stock of Whitman, Inc., an S corporation. Whitman generates a $120,000 loss for the year (not a leap year). On the 189th day of the year, Ann sells her half of the
Whitman stock to her son, Scott. How much of the $120,000 loss, if any, belongs to
Scott?
45. LO.6, 9 In Problem 44, how much of the Whitman loss belongs to Ann and Becky?
Becky’s stock basis is $41,300.
46. LO.5, 6, 8, 9 A calendar year S corporation reports an ordinary loss of $80,000 and a capital loss of $20,000. Mei Freiberg owns 30% of the corporate stock and has a $24,000 basis in her stock. Determine the amounts of the ordinary loss and capital loss, if any, that flow through to Freiberg. Prepare a tax memo for the files, explaining your computations.
47. LO.10 Whindy Corporation, an S corporation, reports a recognized built-in gain of $80,000 and a recognized built-in loss of $10,000 this year. Whindy holds an $8,000 unexpired NOL carryforward from a C corporation year. Whindy’s ordinary income for the year is $65,000. Calculate any built-in gains tax.
48. LO.10 Flint, an S corporation with substantial AEP, reports operating revenues of $410,000, taxable interest income of $390,000, operating expenses of $260,000, and deductions attributable to the interest of $150,000. Calculate any passive investment income penalty tax payable.
49. LO.5, 6, 11 Bonnie and Clyde each own one-third of a fast-food restaurant, and their 13-year-old daughter owns all of the other shares. Both parents work full-time in the restaurant, but the daughter works infrequently. Neither Bonnie nor Clyde receives a salary during the year, when the ordinary income of the
S corporation is $180,000.
An IRS agent estimates that reasonable salaries for Bonnie, Clyde, and the daughter are $30,000, $35,000, and $10,000, respectively. What adjustments would you expect the IRS to impose upon these taxpayers?
50. LO.11 Friedman, Inc., an S corporation, holds some highly appreciated land and inventory and some marketable securities that have declined in value. It anticipates a sale of these assets and a complete liquidation of the company over the next two years. Arnold Schwartz, the CFO, calls you, asking how to treat these transactions. Prepare a tax memo indicating what you told Arnold in the phone conversation.
51. LO.6, 10 Samuel Reese sold 1,000 shares of his stock in Maroon, Inc., an S corporation.
He sold the stock for $15,700 after he had owned it for six years.
Samuel had paid $141,250 for the stock, which was issued under § 1244. Samuel is married and is the owner of the 1,000 shares. Determine the appropriate treatment of any gain or loss on the stock sale.
52. LO.11 Blue is the owner of all of the shares of an S corporation, and Blue is considering receiving a salary of $110,000 from the business. She will pay the
7.65% FICA taxes on the salary, and the S corporation will pay the same amount of
FICA tax. If Blue reduces her salary to $50,000 and takes an additional $60,000 as a cash distribution, how would her Federal income tax liabilities change?
53. LO.1, 6, 8, 9, 11 Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2016. The company generated a $74,000 NOL in 2015 and another NOL of $43,000 in 2016. Orange recorded no other transactions for the year.
At all times in 2015 and 2016, the stock of the corporation is owned by the same four shareholders, each owning 25% of the stock. Pete, one of the shareholders, holds a $6,020 basis in the Orange stock at the beginning of 2016. Identify the Federal income tax issues that Pete faces.
See Appendix E for Comprehensive Tax Return Problems—Form 1120S