CHAPTER 22 S CORPORATIONS

1. During 2014, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2013, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?

a. Nutt recognizes a $1,000 LTCG.

b. Nutt’s stock basis will be $2,000.

c. Nutt’s ordinary income is $15,000.

d. Nutt’s return of capital is $11,000.

e. None of the above.

2. Beginning in 2014, the AAA of Amit, Inc., an S corporation, has a balance of $614,000. During the year, the following items occur.

Operating income	$501,000
Interest income	6,500
Dividend income	13,020
Municipal bond interest income	6,000
Long-term capital loss from sale of investment land	7.400
Section 179 depreciation deduction	6,000
Charitable contributions	19,000
Cash distributions	57,000

Amit’s ending AAA balance is:

a.	$1,055,620.
b.	$1,185,150.
c.	$1,191,150.
d.	$1,242,150.
e.	Some other amount.

3. On January 1, 2014, Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney’s stock. Kinney’s 2014 taxable income is $6,000. Kinney distributes $6,000 to each shareholder on February 1, 2014, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on the distribution?

a. $500 dividend income.

b. $1,000 dividend income.

c. $1,500 dividend income.

d. $3,000 dividend income.

e. None of the above.

4. Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is

$20,000, the corporation distributes appreciated property worth $100,000 (basis of $20,000). Fred’s taxable gain is:

a. $0.

b. $10,000.

c. $80,000.

d. $100,000.

e. None of the above.

5. Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?

a. Operating income.

b. Long-term capital gain.

c. Cost of goods sold.

d. Short-term capital loss.

e. All of the above affect stock basis.

6. You are given the following facts about a solely owned S corporation. What is the shareholder’s ending stock

basis?

Increase in AAA $31,000

Increase in OAA 6,300

Payroll tax penalty 2,140

Beginning stock basis 39,800

Stock purchases 22,000

Tax-exempt insurance proceeds 4,800

Insurance premiums paid (nondeductible) 2,700

a. $61,800.

b. $68,100.

c. $99,100.

d. $100,100.

e. Some other amount.

7. Which of the following reduces a shareholder’s S corporation stock basis?

a. Depletion deductions in excess of the basis of property.

b. Illegal kickbacks paid.

c. Nontaxable income.

d. Sales.

8. You are given the following facts about a 50% owner of an S corporation. Compute his ending stock basis.

Increase in AAA $32,000

Increase in OAA 6,300

Payroll tax penalty 2,140

Beginning stock basis 39,800

Tax-exempt interest income 4,800

Insurance premiums paid (nondeductible) 2,700

Stock purchases 22,000

a. $80,950.

b. $85,750.

c. $100,100.

d. $106,225.

e. Some other amount.

9. Samantha owned 1,000 shares in Evita, Inc., an S corporation, that uses the calendar year. On October 11, 2014, Samantha sells all of her Evita stock. Her basis at the beginning of 2014 was $60,000. Her share of the corporate income for 2014 was $22,000, and she receives a distribution of $35,000 between January 1 and October 11, 2014. Her stock basis at the time of the sale is:

a. $117,000.

b. $82,000.

c. $60,000.

d. $47,000.

10.You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis.

Beginning stock basis $36,800

Increase in AAA 32,000

Increase in OAA 6,300

Payroll tax penalty 2,140

Tax-exempt interest income 4,800

Insurance premiums paid (nondeductible) 2,700

Purchases of additional stock 22,000

a. $71,600.

b. $74,120.

c. $76,220.

d. $78,920.

11.On January 2, 2013, David loans his S corporation $10,000. By the end of 2013 David’s stock basis is zero and the basis in his note has been reduced to $8,000. During 2014, the company’s operating income is $10,000. The company makes 2014 distributions to David of $11,000. David reports a(n):

a. $1,000 LTCG.

b. $3,000 LTCG.

c. $11,000 LTCG.

d. Loan basis of $10,000.

12.On January 2, 2013, Tim loans his S corporation $10,000. By the end of 2013, Tim’s stock basis is zero, and the basis in his note has been reduced to $8,000. During 2014, the company’s operating income is $10,000. The company makes 2014 distributions to Tim of $8,000. Tim reports a(n):

a. $2,000 LTCG.

b. $8,000 LTCG.

c. Stock basis of $2,000.

d. Loan basis of $10,000.

.

13.Randall owns 800 shares in Fabrication, Inc., an S corporation in Moss Hill, Texas. In 2014, the basis in his stock is

$30,000, before the adjustment for this year’s losses. During 2014, Randall’s share of the corporation’s ordinary

loss is $20,000, and his share of its capital loss is $15,000. How much can Randall deduct due to these losses?

a. No deduction.

b. $15,000 ordinary loss; $10,000 capital loss.

c. $17,143 ordinary loss; $12,857 capital loss.

d. $20,000 ordinary loss; $15,000 capital loss.