Tax 311 Problem Set #4

Tax
311
Problem Set #4
Subchapter
S Corporations

I. A. P
Corporation is a calendar year corporation owned by three individuals Adams,
Baker and Chris. It has been in
existence since 1999. On February 4, 2012,
the three shareholders consent to an election on the part of the corporation to
be taxed pursuant to Subchapter S. What
is the effective date of the election and when does P’s status change from a
“C” Corp to an “S” Corp?

1. Would your answer to part (A) be different if
the election is made and consented to on April 4, 2012?

2. If Adams and Baker, but not Chris, consented
to a revocation of the Sub S election on June 8, 2014, what is the effective
date of the revocation?

3. If Adams sold one share of stock to a
non-resident alien individual on October 4, 2014, when would P Corporation
cease to be a Subchapter S corporation?

B. P
Corporation is a calendar year corporation owned by three individuals Adams,
Baker and Chris. It was formed on November
18, 2013. If the three shareholders
consent to an election to be taxed as an S corporation on December 1, 2013 what
is the effective date of that election?

1. What would be the effective date of the
election if the shareholders consented to the election on January 28, 2014?

II. XYZ Corporation has elected to be taxed
as a Subchapter S corporation. Joe Smith
owned 100% of the corporation until February 28, 2013. On that date he sold 30% of his stock to
Brian Bond. On June 30, 2013 he sold
another 20% of his stock to Brian. For
the calendar year 2013 its net book income is equal to $128,000. The following items were included in arriving
at this figure:

Federal Income tax $
22,000
Long-term Capital gains 20,000
Short-term Capital
losses 12,000
Charitable Contributions 6,000
Dividend Income 1,000
Tax exempt Municipal
bond interest 13,000

What
is XYZ’s taxable income for the year 2013 and what is Joe’s share of that
income as well as the separately stated items of the corporation?

III.
Electing Corp. was organized as a C
corporation on June 12, 1995. On January
7, 2012, it filed an election to be taxed as a Subchapter S corporation. At the time of its formation, Green acquired
his stock in exchange for $3,000. On
March 3, 2000 he sold 50% of his stock to Black for $25,000. During the period June 12, 1995 through
December 31, 2011 Electing Corp accumulated $18,500 of earnings and
profits. Electing Corp distributed
$7,500 to both Green and Black on 12/31/13 and $10,000 to both of them on
12/31/14. For the years ending 2012
through 2014 it had the following items of income and loss:

2002 2003 2004

Income
from operations $13,000 $6,000 $18,000
Long-term
Capital loss
0 4,000 2,000
Tax-exempt
bond interest 3,000 3,000 3,000

A. What
are Green’s and Black’s basis in their Electing Corp stock as of 12/31/13,
prior to considering the 2013 distribution?

B. What
is the balance in the corporation’s accumulated adjustment account as of 12/31/13,
prior to considering the 2013 distribution?

C.
What is the amount and
character of the 2013 distributions?

D. What
are Green’s and Black’s basis in their Electing Corp stock as of 12/31/14,
prior to considering the 2014 distribution?

E. What
is the balance in the corporation’s accumulated adjustment account as of 12/31/14,
prior to considering the 2014 distribution?

F.
What is the amount and
character of the 2014 distributions?

IV. Young Corp, a corporation that had been
in existence since 2004, elected Subchapter S status on January 2, 2012. At the time of its election it had two
assets. Asset #1 had been acquired in
2009 and had an adjusted basis of $600,000 and a FMV at the time of the Sub S
election equal to $1,100,000. Asset #2
had been acquired in 2009 and had an adjusted basis equal to $450,000 and a FMV
of $350,000 at the time of the Sub S election.
If Young Corp were to sell Asset #1 on March 3, 2014 for $1,300,000,
what are the consequences to Young Corp and its sole shareholder Smith?