MODULE 36 TAXES: CORPORATE
75 shares x $2 x 365 days $54,750
x $2 x 40 days 2.000
$56,750
25 shares
137. (c) The requirement is to determine the earliest date
on which Ace Corp. (a calendar-year corporation) can be
recognized as an S corporation. Generally, an Selection
will be effective as of the first day of a taxable year if the
election is made on or before the 15th day of the third month
of the taxable year. Since there was no change in sharehold- .
ers during the year, all of Ace's shareholders consented to
the election, and Ace met all eligibility requirements during
the preelection portion of the year, its election filed on Feb-
ruary 10,2009, is effective as of January 1,2009. Note that
if either a shareholder who held stock during the taxable
year and before the date of election did not consent to the
election, or the corporation did not meet the eligibility re-
quirements before the date of election, then an otherwise
valid election would be treated as made for the following
taxable year.
• 365 days to arrive at a loss of $100 per day. Since Meyer
138. (c) The requirement is to determine the number of
shares of voting and nonvoting stock that must be owned by
shareholders making a revocation of an S election. A revo-
cation of an S election may be filed by shareholders owning
more than 50% of an S corporation's outstanding stock. For
this purpose, both voting and nonvoting shares are counted.
In this case, since the S corporation has a total of 50,000
voting and nonvoting shares outstanding, the shareholders
consenting to the revocation must own more than 25,000
shares.
139. (b) The requirement is to determine the amount of
increase for each shareholder's basis in the stock of Haas
Corp., a calendar-year S corporation, for the year ended
December 31, 2009. An S corporation shareholder's basis
for stock is increased by the pass through of all S corpora-
tion income items (including tax-exempt income), and is
decreased by all loss and deduction items, as well as nonde-
ductible expenses not charged to capital. Since Haas has
two equal shareholders, each shareholder' s .stock basis will
be increased by 50% of the operating income of $50,000,
and 50% of the interest income of $10,000, resulting in an
increase for each shareholder of $30,000.
140. (d) The requirement is to determine the condition
that will prevent a corporation from qualifying as an S cor-
poration. Certain eligibility requirements must be satisfied
before a corporation can make a subchapter Selection.
Generally, in order to be an S corporation, a corporation
must have only one class of stock outstanding and have no
more than one hundred shareholders, who are either indi-
viduals, estates, or certain trusts. An S corporation may own
any percentage of the stock of a C corporation, and 100% of
the stock of a qualified subchapter S subsidiary.
141. (c) The requirement is to determine the correct
statement regarding distributions to shareholders by an
S corporation that has no accumulated earnings and profits.
S corporations do not generate any earnings and profits, but
may have accumulated earnings and profits from prior years
as a C corporation. If accumulated earnings and profits are
distributed to shareholders, the distributions will be taxed as
dividend income to the shareholders. However, if an S cor-
poration has no accumulated earnings and profits, distribu-
tions are generally nontaxable and reduce a shareholder's
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basis for stock. To the extent distributions exceed stock
basis, they result in capital gain.
142. (d) The requirement is to determine whether a
corporation that has been an S corporation from its inception
may have both passive and nonpassive income, and be
owned by a bankruptcy estate. To qualify as an S corpora-
tion, a corporation must have one hundred or fewer share-
holders who are individuals (other than nonresident aliens),
certain trusts, or estates (including bankruptcy estates). If a
corporation has been an S corporation since its inception,
there is no limitation on the amount or type of income that it
generates, and it can have both passive and nonpassive in-
come.
14~. (b) The requirement is to determine Meyer's share
of an S corporation's $36,500 ordinary loss. An S corpora-
tion's items of income and deduction are allocated on a daily
basis to anyone who was a shareholder during the taxable
year. Here, the $36,500 ordinary loss would be divided by
held 50% of the S corporation's stock for forty days,
Meyer's share of the loss would be ($100 x 50%) x 40 days
== $2,000.
144. (c) The requirement is to determine the period that a
calendar-year corporation must wait before making a new S
election following the termination of its S status during
2009. Generally, following the revocation or termination of
an S election, a corporation must wait five y,ears before re-
electing subchapter S status unless the IRS consents to an .
earlier election.
145. (d) The requirement is to determine which will ren-
der a corporation ineligible for S corporation status. An-
swer (d) is correct because an S corporation is limited to 100
shareholders for tax years beginning after December 31,
'2004. Answers (a) and (b) are incorrect because a dece-
dent's estate and a bankruptcy estate are allowed as S corpo-
ration shareholders. Although an S corporation may only
have one class of stock issued and outstanding, answer (c) is
incorrect because a difference in voting rights among out-
standing common shares is not treated as having more than
one class of stock outstanding.
146. (d) The requirement is to determine the correct
statement with regard to the application of the "at-risk" rules
to S corporations and their shareholders. The at-risk rules
limit a taxpayer's deduction of losses to the amount that the
taxpayer can actually lose (i.e., generally the amount of cash
and the adjusted basis of property invested by the taxpayer,
plus any liabilities for which the taxpayer is personally li-
able). The at-risk rules apply to S corporation shareholders
rather than at the corporate level, with the result that the
deduction of S corporation losses is limited to the amount of
a shareholder's at-risk investment. The application of the at-
risk rules does not depend on the type of income reported by
the S corporation, are not subject to any elections made by S
corporation shareholders, and are applied without regard to
the S corporation's ratio of debt to equity.
147. (d) The requirement is to determine the item that
may be deducted by an S corporation. Items having no spe-
cial tax characteristics can be netted together in the compu-
tation of the S corporation's ordinary income or loss, with
only the net amount passed through to shareholders. Thus,
only ordinary items (e.g., amortization of organizational