Research Problems
Research Problem 1. Alice owns 100 percent of Medical Data, a C corporation, and
100 percent of Your Realtors, an S corporation. She worked full time for Medical Data (i.e., she materially participated in the entity), but Alice did not materially participate in Your Realtors. During the tax years 2014 through 2016, Your Realtors leased real estate to Medical Data.
Alice reported these rental amounts as passive activity income on her Schedule E, and she offset that income against passive activity losses from other entities. The IRS reclassified this rental income as nonpassive income under Reg. § 1.469–2(f)(6). Who is right? Does § 469 apply to S corporations? Elaborate.
Research Problem 2. Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Streetz, an S corporation real estate company. He manages all aspects of the company’s operations, and he is the only person working at the company that holds a real estate broker’s license. Sean works 12-hour days and takes few days off. Streetz’s gross receipts and net income figures were reported as follows.
Year Gross Receipts Net Income
2015 $376,453 $122,605
2016 405,244 161,660
2017 518,189 231,454
Sean and his wife, Kim, filed joint Federal income tax returns, but they did not report any wages or salaries on line 7 of their returns. During 2017, Moon transferred $240,000 from the S corporation to his personal account.
You are an expert witness for the IRS. Identify the items you would present to the
U.S. Tax Court with respect to the amount of Moon’s compensation that is subject to employment taxes and any other taxes due for the year 2017 (especially the Medicare net investment income tax). Hint: This is a reasonable compensation issue.
Research Problem 3. Make a graph of the growth in the number of S elections since
1980, using increments of no more than five years. On the same graph, show the maximum Federal income tax rates for those years as they applied to individuals and to C corporations. Send your graph in an e-mail to your instructor with some explanatory comments as to what you found.
Research Problem 4. Summarize the trends in court decisions concerning salaries paid to shareholders of small S corporations. Title your essay “S Corporation Salaries: Too
Much or Too Little?” Send your essay in an e-mail to your instructor.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Roger CPA Review Questions
1. Mindy, an individual, owns 100% of Markee, an S corporation, and she has an initial stock basis of $10,000. This is the first year of Markee’s operations. Additional items reported by Markee during the current year are:
Municipal bond interest $10,000
Ordinary income 3,400
Shareholder distributions 5,000
What was Mindy’s basis in Markee at the end of the tax year?
a. $5,000
b. $8,400
c. $15,000
d. $18,400
2. Mindy, an individual, owns 100% of Markee, an S corporation, and she has an initial stock basis of $10,000. This is the first year of Markee’s operations. Additional items reported by Markee during the current year are:
Municipal bond interest $10,000
Ordinary income 3,400
Shareholder distributions 5,000
What amount of the $5,000 distribution is taxable to Mindy?
a. $0
b. $1,600
c. $3,400
d. $5,000
3. Monie, an individual taxpayer, owns 50% of Monie & Co, an S corporation. At the beginning of the tax year, Monie’s basis in Monie & Co stock was $55,000. During the year, Monie & Co realized ordinary loss in the amount of $45,000 and a short-term capital loss of $15,000. Monie & Co made total distributions of $70,000 to its shareholders during this taxable year. What amount of the $70,000 distribution is taxable to Monie?
a. $70,000
b. $35,000
c. $25,000
d. $10,000
4. Which of the following would cause a revocation of S status for an existing
S corporation?
I. A partnership becomes a shareholder of an S corporation
II. An S corporation becomes a partner in a partnership
III. An S corporation becomes a shareholder in a C corporation
IV. A nonresident alien becomes a shareholder of an S corporation
a. None of the above
b. II and III
c. I and IV
d. All of the above
5. Rocket Co., an S corporation, pays single-coverage health insurance premiums of $17,000 per year. Philip is a 1% shareholder-employee in Rocket. On Philip’s behalf,
Rocket pays Philip’s family coverage under the health insurance plan. What amount of insurance premiums is includible in Philip’s gross income?
a. $17,000
b. $170
c. $17
d. $0
6. Shareholders of Rayle Co., a calendar year corporation whose S status was terminated during 2016, are looking to reapply for the S status as soon as possible. What is the earliest year a new S election can be made, in the absence of IRS consent to an earlier election?
a. 2021
b. 2020
c. 2019
d. 2016
7. An S corporation must separately pass through which of the following items to its shareholders?
I. A net Section 1231 loss
II. Foreign income taxes
III. Investment interest expense
a. All of the above
b. I and II
c. II and III
d. II only
8. Pankee, Inc., was formed as a C corporation and made an S election five years ago.
Which of the following statements correctly describes the taxability of Pankee’s distributions to its shareholders?
a. A distribution to the shareholders will be taxable to the shareholders, if it is treated as coming from the S corporation’s accumulated adjusted account and represents an amount already taxed to the shareholders.
b. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation’s accumulated adjusted account and represents an amount already taxed to the shareholders.
c. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation’s accumulated earnings and profits, earned during its years as a C corporation.
d. A distribution to the shareholders will be nontaxable to the shareholders regardless of whether it is treated as coming from the S corporation’s accumulated adjusted account or its accumulated earnings and profits.
9. An S corporation’s revocation statement is effective if it is signed by shareholders owning:
a. More than 50% of S corporation’s voting stock only.
b. 50% or more of S corporation’s voting stock only.
c. More than 50% of S corporation’s voting and nonvoting stock.
d. 50% or more of S corporation’s voting and nonvoting stock.
10. Zana Corp is a calendar year S corporation. Pack Corp, a C corporation, became a shareholder in Zana on September 4, 2015 (the 247th day of the calendar year). During
2015, Zana reported nonseparately computed income of $182,500. Assuming no special elections are made, which scenario below describes the correct way to report Zana’s income for the 2015 tax years?
a. Zana should file a full year S corporation tax return reporting the entire income of $182,500.
b. Zana should file a full year C corporation tax return reporting the entire income of $182,500.
c. Zana should file a partial year S corporation tax return reporting income of $59,500 and a partial year C corporation tax return reporting income of $123,000.
d. Zana should file a partial year S corporation tax return reporting income of $123,000 and a partial year C corporation tax return reporting income of $59,500.
11. As of January 1, 2015, Kirk owned all 300 shares of Cork, Inc., a calendar year S corporation.
On September 1, 2015 (243 days after January 1), Kirk sold 50 shares each to Steve and Moe and kept the remaining 200 shares for himself. For the year ended
December 31, 2015, Cork reported nonseparately computed income of $109,500 and made no distributions to its shareholders. What amount of nonseparately stated income from Cork should Kirk report on his 2015 tax return?
a. $97,300
b. $109,500
c. $73,000
d. $36,500
Research Problem 1. Alice owns 100 percent of Medical Data, a C corporation, and
100 percent of Your Realtors, an S corporation. She worked full time for Medical Data (i.e., she materially participated in the entity), but Alice did not materially participate in Your Realtors. During the tax years 2014 through 2016, Your Realtors leased real estate to Medical Data.
Alice reported these rental amounts as passive activity income on her Schedule E, and she offset that income against passive activity losses from other entities. The IRS reclassified this rental income as nonpassive income under Reg. § 1.469–2(f)(6). Who is right? Does § 469 apply to S corporations? Elaborate.
Research Problem 2. Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Streetz, an S corporation real estate company. He manages all aspects of the company’s operations, and he is the only person working at the company that holds a real estate broker’s license. Sean works 12-hour days and takes few days off. Streetz’s gross receipts and net income figures were reported as follows.
Year Gross Receipts Net Income
2015 $376,453 $122,605
2016 405,244 161,660
2017 518,189 231,454
Sean and his wife, Kim, filed joint Federal income tax returns, but they did not report any wages or salaries on line 7 of their returns. During 2017, Moon transferred $240,000 from the S corporation to his personal account.
You are an expert witness for the IRS. Identify the items you would present to the
U.S. Tax Court with respect to the amount of Moon’s compensation that is subject to employment taxes and any other taxes due for the year 2017 (especially the Medicare net investment income tax). Hint: This is a reasonable compensation issue.
Research Problem 3. Make a graph of the growth in the number of S elections since
1980, using increments of no more than five years. On the same graph, show the maximum Federal income tax rates for those years as they applied to individuals and to C corporations. Send your graph in an e-mail to your instructor with some explanatory comments as to what you found.
Research Problem 4. Summarize the trends in court decisions concerning salaries paid to shareholders of small S corporations. Title your essay “S Corporation Salaries: Too
Much or Too Little?” Send your essay in an e-mail to your instructor.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Roger CPA Review Questions
1. Mindy, an individual, owns 100% of Markee, an S corporation, and she has an initial stock basis of $10,000. This is the first year of Markee’s operations. Additional items reported by Markee during the current year are:
Municipal bond interest $10,000
Ordinary income 3,400
Shareholder distributions 5,000
What was Mindy’s basis in Markee at the end of the tax year?
a. $5,000
b. $8,400
c. $15,000
d. $18,400
2. Mindy, an individual, owns 100% of Markee, an S corporation, and she has an initial stock basis of $10,000. This is the first year of Markee’s operations. Additional items reported by Markee during the current year are:
Municipal bond interest $10,000
Ordinary income 3,400
Shareholder distributions 5,000
What amount of the $5,000 distribution is taxable to Mindy?
a. $0
b. $1,600
c. $3,400
d. $5,000
3. Monie, an individual taxpayer, owns 50% of Monie & Co, an S corporation. At the beginning of the tax year, Monie’s basis in Monie & Co stock was $55,000. During the year, Monie & Co realized ordinary loss in the amount of $45,000 and a short-term capital loss of $15,000. Monie & Co made total distributions of $70,000 to its shareholders during this taxable year. What amount of the $70,000 distribution is taxable to Monie?
a. $70,000
b. $35,000
c. $25,000
d. $10,000
4. Which of the following would cause a revocation of S status for an existing
S corporation?
I. A partnership becomes a shareholder of an S corporation
II. An S corporation becomes a partner in a partnership
III. An S corporation becomes a shareholder in a C corporation
IV. A nonresident alien becomes a shareholder of an S corporation
a. None of the above
b. II and III
c. I and IV
d. All of the above
5. Rocket Co., an S corporation, pays single-coverage health insurance premiums of $17,000 per year. Philip is a 1% shareholder-employee in Rocket. On Philip’s behalf,
Rocket pays Philip’s family coverage under the health insurance plan. What amount of insurance premiums is includible in Philip’s gross income?
a. $17,000
b. $170
c. $17
d. $0
6. Shareholders of Rayle Co., a calendar year corporation whose S status was terminated during 2016, are looking to reapply for the S status as soon as possible. What is the earliest year a new S election can be made, in the absence of IRS consent to an earlier election?
a. 2021
b. 2020
c. 2019
d. 2016
7. An S corporation must separately pass through which of the following items to its shareholders?
I. A net Section 1231 loss
II. Foreign income taxes
III. Investment interest expense
a. All of the above
b. I and II
c. II and III
d. II only
8. Pankee, Inc., was formed as a C corporation and made an S election five years ago.
Which of the following statements correctly describes the taxability of Pankee’s distributions to its shareholders?
a. A distribution to the shareholders will be taxable to the shareholders, if it is treated as coming from the S corporation’s accumulated adjusted account and represents an amount already taxed to the shareholders.
b. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation’s accumulated adjusted account and represents an amount already taxed to the shareholders.
c. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation’s accumulated earnings and profits, earned during its years as a C corporation.
d. A distribution to the shareholders will be nontaxable to the shareholders regardless of whether it is treated as coming from the S corporation’s accumulated adjusted account or its accumulated earnings and profits.
9. An S corporation’s revocation statement is effective if it is signed by shareholders owning:
a. More than 50% of S corporation’s voting stock only.
b. 50% or more of S corporation’s voting stock only.
c. More than 50% of S corporation’s voting and nonvoting stock.
d. 50% or more of S corporation’s voting and nonvoting stock.
10. Zana Corp is a calendar year S corporation. Pack Corp, a C corporation, became a shareholder in Zana on September 4, 2015 (the 247th day of the calendar year). During
2015, Zana reported nonseparately computed income of $182,500. Assuming no special elections are made, which scenario below describes the correct way to report Zana’s income for the 2015 tax years?
a. Zana should file a full year S corporation tax return reporting the entire income of $182,500.
b. Zana should file a full year C corporation tax return reporting the entire income of $182,500.
c. Zana should file a partial year S corporation tax return reporting income of $59,500 and a partial year C corporation tax return reporting income of $123,000.
d. Zana should file a partial year S corporation tax return reporting income of $123,000 and a partial year C corporation tax return reporting income of $59,500.
11. As of January 1, 2015, Kirk owned all 300 shares of Cork, Inc., a calendar year S corporation.
On September 1, 2015 (243 days after January 1), Kirk sold 50 shares each to Steve and Moe and kept the remaining 200 shares for himself. For the year ended
December 31, 2015, Cork reported nonseparately computed income of $109,500 and made no distributions to its shareholders. What amount of nonseparately stated income from Cork should Kirk report on his 2015 tax return?
a. $97,300
b. $109,500
c. $73,000
d. $36,500