Question 1

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

Accepted Answer

This statement is true. S corporations may have different classes of stock with varying voting rights, as long as those shares have equal distribution and liquidation rights. However, it is important to note that the S corporation must still comply with the requirement that there may only be one class of stock.

Question 2

An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

Accepted Answer

An S corporation can use a noncalendar year-end if it can establish a business purpose, such as to align with the fiscal year of its shareholders or to better match its operational cycle, for an alternative year-end.

Question 3

Publicly traded corporations cannot be treated as S corporations.

Accepted Answer

Publicly traded corporations are required to meet certain criteria and follow specific regulations, and cannot be treated as S corporations under the Internal Revenue Code. S corporations are limited to certain shareholders and have different tax treatment than regular corporations.

Question 4

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.

Accepted Answer

The specific identification method and monthly allocation method are generally associated with allocating income and deductions for tax purposes, but an involuntary S corporation election termination typically involves specific IRS rules and procedures for handling the termination and its tax implications, not these allocation methods. These methods are more commonly related to inventory accounting or other specific income allocation scenarios, not directly to S corporation status changes.

Question 5

S corporations face the same restrictionsas partnerships and C corporations on using the cash method of accounting.

Accepted Answer

S corporations can generally use the cash method of accounting without the restrictions that apply to C corporations and partnerships associated with C corporations, which are subject to more stringent rules based on their revenue and the nature of their business.

Question 6

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.

Accepted Answer

The answer of To make an S election effective as...

Question 7

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Accepted Answer

This statement is true. Passive investment income does not trigger the involuntary termination of S corporation status. However, if an S corporation earns excessive passive income or engages in prohibited activities, it may still face the risk of losing its S status.

Question 8

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Accepted Answer

This statement is true. S corporations make accounting decisions at the entity level, just like partnerships.

Question 9

An S corporation election may be voluntarily or involuntarily terminated.

Accepted Answer

An S corporation election can be voluntarily or involuntarily terminated.

Question 10

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.

Accepted Answer

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 50 percent of the stock agree, not 25 percent.

Question 11

The same exact requirements for forming and contributing property govern S corporations and partnerships.

Accepted Answer

S corporations and partnerships are governed by different sets of tax rules and regulations regarding the formation, operation, and contribution of property. For example, the rules for contributing property to a partnership can result in a tax-free transaction under certain conditions (IRC Section 721), whereas contributing property to an S corporation may result in taxable gain if the transaction does not meet specific requirements (IRC Section 351).

Question 12

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

Accepted Answer

S corporations are limited to 100 shareholders, and family members can be treated as a single shareholder under specific conditions, but the general rule is that each person counts as an individual shareholder unless they elect to be treated as a single shareholder.

Question 13

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.

Accepted Answer

The specific identification method is a valid method for allocating income in short S corporation tax years resulting from an involuntary termination of S status.

Question 14

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.

Accepted Answer

The answer of After terminating or voluntarily revoking S corporation...

Question 15

Bobby T (75percent owner)would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5percent owner)does not want to terminate S corporation status. Bobby T can terminatethe Scorporation status for DJ, Incorporated, without Dallas's consent.

Accepted Answer

As a 75% owner, Bobby T has the majority control and can make decisions regarding the termination of S corporation status without the consent of the minority owner, Dallas.

Question 16

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

Accepted Answer

According to IRS rules, if an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election. This is because nonresident aliens are not allowed to hold shares in S corporations.

Question 17

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.

Accepted Answer

S corporations with earnings and profits from prior C corporation years face more complex rules, particularly concerning distributions and the potential for double taxation, than S corporations without such earnings and profits.

Question 18

Bobby T (95percent owner)would like to elect S corporation status for DJ, Incorporated, but Dallas (5percent owner)does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Incorporated, without Dallas's consent.

Accepted Answer

In order to elect S corporation status for a corporation, all shareholders must consent to the election. Therefore, if even one shareholder does not want to elect S corporation status, it cannot be done.

Question 19

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.

Accepted Answer

An S election is terminated if the S corporation has passive investment income in excess of 25 percent of gross receipts for three consecutive years, not 20 percent.

Question 20

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.

Accepted Answer

S corporations are generally required to adopt a December 31 year-end to align with the tax year of their individual shareholders, unless they meet specific exceptions that allow for a different fiscal year.

Quiz 22: S Corporations