Chapter 22
If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2024, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)? A) January 1, 2024 B) February 10, 2024 C) January 1, 2025 D) February 10, 2025 E) None of the choices are correct.
a
Which of the following is the correct order in which loss limitation rules are applied? A) Basis rules first, at-risk rules second, passive loss rules third B) Passive loss rules first, at-risk rules second, basis rules third C) Basis rules first, passive loss rules second, at-risk rules third D) Passive loss rules first, basis rules second, at-risk rules third E) None of the choices are correct.
a
J.D. formed Clampett, Incorporated, as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Incorporated (a C corporation) as shareholders. On January 15, 2024, Jethro, Incorporated, sold all its shares to Jane Hathaway. On February 28, 2024, Clampett, Incorporated, filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election? A) January 1, 2024 B) January 1, 2025 C) January 1, 2026 D) February 28, 2025 E) Never
b
On March 15, 2024, J.D. sold his Clampett, Incorporated (an S corporation) shares to Ellie Mae, Incorporated (a C corporation), terminating Clampett, Incorporated's S election on March 15, 2024. Absent permission from the IRS, what is the earliest date Clampett, Incorporated, may again elect to be taxed as an S corporation? A) January 1, 2030 B) January 1, 2029 C) January 1, 2028 D) January 1, 2027 E) January 1, 2025
b
Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Incorporated, as the original 90 shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends. According to the S corporation shareholder limit rules, how many shareholders does 2hit, Incorporated, have? A) 90 B) 92 C) 95 D) 97 E) None of the choices are correct.
b
Which of the following is a requirement to be an S corporation? A) Be a domestic or foreign corporation B) Have only one class of stock C) Have fewer than 75 shareholders D) Have at least one corporate shareholder E) None of the choices are correct.
b
If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2024, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)? A) January 1, 2024 B) March 18, 2024 C) January 1, 2025 D) March 16, 2025 E) None of the choices are correct.
c
The IRS may consent to an early reelection of S corporation status after a termination under which of the following? A) The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination. B) The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination. C) The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders. D) The corporation had only two ineligible shareholders at the termination date. E) None of the choices are correct.
c
Which of the following is prohibited from being an S corporation shareholder? A) Foreign citizens that are U.S. residents B) U.S. citizens C) C corporations D) 51 unrelated individuals E) None of the choices are correct.
c
Which of the following is not an adjustment to an S corporation shareholder's stock basis? A) Increase for any contributions to the S corporation during the year B) Increase for shareholder's share of ordinary business income C) Decrease for shareholder's share of nondeductible items D) Increase for distributions during the year E) None of the choices are correct.
d
Which of the following would not result in an S election termination? A) Having 120 unrelated shareholders B) Having a C corporation as a shareholder C) Issuing a second class of stock D) Having excess passive investment income for two consecutive years E) None of the choices are correct.
d
Suppose a calendar-year C corporation, New Corporation, Incorporated, was formed on January 1, 2024, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Incorporated, a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2024. When is the S election effective? A) January 1, 2024 B) April 14, 2024 C) January 1, 2025 D) April 14, 2025 E) Never
e
Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax? A) Passive income B) Investment interest income C) Dividends D) Short-term capital gains E) All of these choices are considered investment income for the net investment income tax.
e
Which of the following is not a separately stated item for S corporations? A) Dividends B) Interest income C) Charitable contributions D) Investment interest expense E) All of the choices are separately stated items.
e
Which of the following is not a true statement? A) For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees. B) For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the shareholder-employees who own more than 2 percent. C) S corporation owners who also work for the S corporation have a tax incentive to pay themselves a low salary. D) An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes. E) None of the choices are false.
e
Which of the following is not considered a family member for purposes of the S corporation shareholder limit test? A) Brother B) Great-grandparent C) Grandchild D) Grandparent E) None of the choices are correct.
e
After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election. ⊚ true ⊚ false
false
An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree. ⊚ true ⊚ false
false
An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes. ⊚ true ⊚ false
false
An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years. ⊚ true ⊚ false
false
For an S corporation shareholder to deduct an S corporation loss, the loss must clear three separate tax provision hurdles: 1. tax-basis, 2. at-risk amount, and 3. tax shelter rules. ⊚ true ⊚ false
false
S corporations face the same restrictions as partnerships and C corporations on using the cash method of accounting. ⊚ true ⊚ false
false
S corporations have considerable flexibility in making special profit and loss allocations of operating income. ⊚ true ⊚ false
false
S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder. ⊚ true ⊚ false
false
Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss). ⊚ true ⊚ false
false
SoTired, Incorporated, a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Incorporated, will continue to use a June 30 year-end as an S corporation. ⊚ true ⊚ false
false
The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years. ⊚ true ⊚ false
false
The same exact requirements for forming and contributing property govern S corporations and partnerships. ⊚ true ⊚ false
false
The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination. ⊚ true ⊚ false
false
To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year. ⊚ true ⊚ false
false
Unlike in partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero. ⊚ true ⊚ false
false
An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end. ⊚ true ⊚ false
true
An S corporation election may be voluntarily or involuntarily terminated. ⊚ true ⊚ false
true
An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder. ⊚ true ⊚ false
true
An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax. ⊚ true ⊚ false
true
As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually. ⊚ true ⊚ false
true
Bobby T (75 percent owner) would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5 percent owner) does not want to terminate S corporation status. Bobby T can terminate the S corporation status for DJ, Incorporated, without Dallas's consent. ⊚ true ⊚ false
true
Bobby T (95 percent owner) would like to elect S corporation status for DJ, Incorporated, but Dallas (5 percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Incorporated, without Dallas's consent. ⊚ true ⊚ false
true
Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations. ⊚ true ⊚ false
true
Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights. ⊚ true ⊚ false
true
If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination. ⊚ true ⊚ false
true
If an S corporation shareholder sells their stock to a nonresident alien, it will automatically terminate the S election. ⊚ true ⊚ false
true
In general, an S corporation shareholder makes increasing adjustments to their basis first, followed by adjustments that decrease basis. ⊚ true ⊚ false
true
Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level. ⊚ true ⊚ false
true
Publicly traded corporations cannot be treated as S corporations. ⊚ true ⊚ false
true
Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation. ⊚ true ⊚ false
true
S corporation losses allocated to a shareholder that are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization. ⊚ true ⊚ false
true
S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis. ⊚ true ⊚ false
true
S corporations are not entitled to a dividends received deduction. ⊚ true ⊚ false
true
S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits. ⊚ true ⊚ false
true
The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination. ⊚ true ⊚ false
true
