Federal Tax Research 10th Edition by Roby Sawyers,William Raabe,Gerald Whittenburg,Steven Gill

Exercise 13

Prudence was named a shareholder in her law firm, which operates as an S corporation. Her payments into the firm's capital were to start in approximately nine months, when an audit would determine the full value of the firm and a new corporate year would commence. Paperwork with the pertinent state offices was completed, naming Prudence as a shareholder and director and adding her name to that of The firm. However, Prudence left the firm eight months after the announcement, i.e., before she paid any money for shares. Is Prudence liable for tax on her share of the entity's earnings for the eight months