Deck 22: S: Corporations

Question 1

Shareholders may deduct losses in excess of their basis in S corporation stock when a shareholder holds a loan basis of zero.

Answer 1

False

Question 2

Only 80% of the shareholders must consent to an S election.

Answer 2

False

Question 3

An S corporation can be a shareholder in another corporation.

Answer 3

True

Question 4

Net operating losses incurred before an S election do not flow through to the shareholders once the election is in effect.

Question 5

For Federal income tax purposes, taxation of S corporations resembles that of partnerships.

Question 6

Rents always are considered to be passive investment income in S status.

Question 7

An S election made before becoming a corporation is valid only beginning with the first 22-month tax year.

Question 8

Where the S corporation rules are silent, partnership rules apply to the S corporation.

Question 9

Distribution of appreciated property is taxable to an S corporation.

Question 10

Charitable contributions are subject to a 10% limitation at the S corporation level.

Question 11

For a new corporation, a premature S election may not be effective.

Question 12

There is no limit on the amount of passive investment income that an S corporation can earn during the year.

Question 13

Most IRAs can own stock in an S corporation.

Question 14

If a resident alien shareholder moves outside the U.S., the S election is terminated.

Question 15

An S election is made on the shareholder's Form 1040.

Question 16

No maximum or minimum dollar sales or capitalization restrictions apply to S corporations.

Question 17

A two-or-more member LLC operates under partnership tax principles.

Question 18

As a general rule, S corporation treatment is not advantageous when the individual tax rate far exceeds the applicable corporate tax rate.

Question 19

The alternative minimum tax applies to an S corporation.

Question 20

The passive loss limitations apply at the S corporation shareholder level.

Question 21

An S shareholder who dies during the corporate tax year must report his or her share of the pro rata income (or loss) up to the date of death on the final individual tax return.

Question 22

The Schedule M-3 is the same for a C corporation and an S corporation.

Question 23

An S corporation that has total assets of at least $7.5 million on Schedule L at the end of the tax year must file a Schedule M-3.

Question 24

The Section 179 expense deduction is a Schedule K item.

Question 25

An S corporation can take advantage of the dividends received deduction.

Question 26

Tax-exempt income is not separately stated on Schedule K of Form 1120S.

Question 27

A distribution from OAA is not taxable.

Question 28

When loss assets are distributed by an S corporation, a shareholder's basis is equal to the asset's fair market value.

Question 29

Tax-exempt income is a Schedule K item for an S corporation.

Question 30

An S corporation's separately stated items are identical to those separately stated by partnerships.

Question 31

Post-termination distributions that are charged against OAA are received tax-free.

Question 32

An item that appears in the "Other Adjustments Account" affects stock basis, but not AAA, such as tax-exempt interest.

Question 33

A per-day, per-share allocation of flow-through S corporation items must be used, unless the shareholder disposes of the entire interest in the entity.

Question 34

A capital loss allocated to a shareholder always reduces the Other Adjustments Account.

Question 35

Any distribution of cash or property by a corporation that does not exceed the balance of AAA with respect to the stock during a post-termination transition period of approximately one year is applied against and reduces the adjusted basis of the stock.

Question 36

A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.

Question 37

An S shareholder's basis is increased by stock purchases and capital contributions.

Question 38

An S corporation does not recognize a loss when distributing assets that are worth less than their basis.

Question 39

Depreciation recapture income is a Schedule K item.

Question 40

All tax preference items flow through the S corporation, to be included in the shareholders' AMT calculations.

Question 41

The § 1374 tax is a corporate-level tax on any built-in gain recognized in 2012 when an S corporation disposes of an asset in a taxable disposition within 10 tax years after the date on which the S election took effect.

Question 42

An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.

Question 43

Passive investment income includes net capital gains from the sale of stocks and securities.

Question 44

Any losses that are suspended under the at-risk rules are carried forward and are available during an S corporation's post-termination period.

Question 45

An S corporation can claim a deduction for its NOL carryovers.

Question 46

Compensation for services rendered to an S corporation is subject to FICA taxes.

Question 47

Pass-through S corporation losses can reduce the basis in the shareholder's loan to the entity, but distributions do not.

Question 48

An S corporation shareholder's basis includes his or her direct investments plus a ratable share of any corporate liabilities.

Question 49

It is not beneficial for an S corporation to issue § 1244 stock.

Question 50

Form 1120S provides a shareholder's computation of his or her stock basis.

Question 51

The carryover period for the NOLs of a C corporation continues to run during S corporation years.

Question 52

An S shareholder's basis is not decreased by distributions treated as being paid from AAA.

Question 53

An S shareholder's basis in his or her stock can be reduced below zero.

Question 54

The § 1202 exclusion of gain is available on disposition of S corporation stock.

Question 55

Any excess of S corporation losses or deductions over the shareholder's combined stock and debt basis is suspended until there is a subsequent stock or debt basis.

Question 56

Which statement is incorrect?

A)S corporations are treated as corporations under state law.
B)S corporations resemble partnerships under the Federal income tax law.
C)The alternative minimum tax applies to some S corporations.
D)An S corporation may not allocate income and deduction items to specific shareholders like a partnership can.

Question 57

The LIFO recapture tax is a variation of the passive investment income penalty tax.

Question 58

An S corporation may be subject to the following tax.

A)Built-in gains tax.
B)Foreign earnings tax.
C)Federal income tax.
D)Alternative minimum tax.

Question 59

An S shareholder's stock basis includes a ratable share of any S corporation liabilities.

Question 60

Any distribution made by an S corporation during a tax year is taken into account before accounting for the year's losses.

Question 61

Which statement is correct with respect to an S corporation?

A)There is no advantage to also elect § 1244 stock.
B)An S corporation can own 85% of an insurance company.
C)An estate may be an S shareholder.
D)A voting trust arrangement is not available.
E)None of the above statements is correct.

Question 62

A new S corporation shareholder can revoke the S election unilaterally, if he/she owns how much of the existing S corporation's stock?

A)More than 50%.
B)50% or more.
C)The election can be revoked only if all of the shareholders consent.
D)The election cannot be revoked during the first year of the new shareholder's ownership.

Question 63

Which item is not included in an S corporation's nonseparately computed income?

A)Net sales.
B)Cost of goods sold.
C)Dividends received.
D)Depreciation recapture.

Question 64

Which, if any, of the following can be an eligible shareholder of an S corporation?

A)A resident alien.
B)A U.S.partnership.
C)A foreign corporation.
D)None of the above can own S stock.

Question 65

Which item has no effect on an S corporation's AAA?

A)Stock purchase by a shareholder.
B)Interest expense.
C)Cost of goods sold.
D)Capital loss.
E)All of the above modify AAA.

Question 66

Which, if any, of the following can be an eligible shareholder of an S corporation?

A)A child, age 10.
B)A resident alien.
C)A voting trust.
D)The estate of a deceased shareholder.
E)All of the above can own S stock.

Question 67

Which statement is incorrect with respect to filing an S election?

A)Form 2553 must be filed.
B)All shareholders must consent.
C)The election may be filed in the previous year.
D)An extension of time is available for filing Form 2553.
E)None of the above statements is incorrect.

Question 68

Identify a disadvantage of being an S corporation.

A)Generally, trusts cannot be shareholders.
B)Losses flow through to the shareholders.
C)The AMT on corporations is avoided.
D)Tax-exempt income flows through to the shareholders.
E)None of the above is a disadvantage of the S election.

Question 69

Four unrelated individuals acquire assets on behalf of Jump Corporation on May 21, 2012, purchased assets on June 5, 2012, and begin doing business on June 15, 2012.They subscribe to shares of stock, file articles of incorporation for Jump, and become shareholders on July 23, 2012.The S election must be filed no later than 2 1/2 months after:

A)May 21, 2012.
B)June 5, 2012.
C)June 15, 2012.
D)July 23, 2012.
E)December 31, 2012.

Question 70

The maximum number of shareholders in an S corporation is:

A)75.
B)100.
C)200.
D)Indeterminable.

Question 71

Which statement is incorrect with respect to the number-of-shareholders test in filing an S election?

A)Husband Jaime and wife Maria count as one shareholder.
B)Grandmother Adela and granddaughter Maria count as one shareholder.
C)Husband Jaime and the estate of wife Maria count as one shareholder.
D)Husband Jaime and ex-wife Isabel count as one shareholder.
E)None of the above statements is incorrect.

Question 72

Which statement is incorrect about an S corporation?

A)Nonresident aliens cannot own S corporation stock.
B)A one-person LLC can be an S shareholder.
C)A partnership can own S corporation stock.
D)An S corporation can be a partner in a partnership.
E)None of the above statements is incorrect.

Question 73

Several individuals acquire assets on behalf of Skip Corporation on May 28, 2012, purchased assets on June 3, 2012, and began business on June 11, 2012.They subscribe to shares of stock, file articles of incorporation for Skip, and become shareholders on June 21, 2012.The S election must be filed no later than 2 1/2 months after:

A)May 28, 2012.
B)June 3, 2012.
C)June 11, 2012.
D)June 21, 2012.
E)December 31, 2012.

Question 74

Which equity arrangement cannot be used by an S corporation?

A)Phantom stock.
B)Stock appreciation rights.
C)Warrants.
D)Straight debt.
E)An insurance company structure.

Question 75

Which item does not appear on Schedule K of Form 1120S?

A)Tax-exempt interest income.
B)Section 1231 gain.
C)Section 179 expense deduction.
D)Depreciation recapture income.
E)All of the above appear on Schedule K.

Question 76

Which corporation is eligible to make the S election?

A)Foreign corporation.
B)A one-shareholder corporation.
C)An insurance company.
D)A U.S.bank.
E)None of the above can select S status.

Question 77

Which item does not appear on Schedule K of Form 1120S?

A)Intangible drilling costs.
B)Foreign loss.
C)Utilities expense.
D)Recovery of a tax benefit.
E)All of the above items appear on Schedule K.

Question 78

Which statement is incorrect with respect to an S shareholder's consent?

A)A consent extension is available only if Form 2553 is filed on a timely basis, reasonable cause is given, and the interests of the government are not jeopardized.
B)Both husband and wife must consent if one owns the stock as community property.
C)An S election requires a consent from all of the S corporation's shareholders.
D)A consent must be in writing.
E)None of the above statements is incorrect.

Question 79

What method is used to allocate S corporation income or losses (unless an election to the contrary is made)?

A)Any method agreed to by all of the shareholders.
B)Per-day allocation.
C)FIFO method.
D)LIFO method.

Question 80

Which statement is incorrect?

A)S corporation status allows shareholders to realize tax benefits from corporate losses immediately.
B)Shareholder-level tax on corporate profits can be eliminated by a step-up in the basis of the stock upon a shareholder's death.
C)Fewer than 50% of all U.S.corporations make the S election.
D)An S corporation resembles an LLC for Federal income tax purposes.
E)None of the above.