Question

22 a

Assume the following S corporations and gross receipts, passive investment income, and corporate E&P. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year? All became S corporations at the beginning of year 1. (Leave no answer blank. Select "NA" if no effect.)

a. Clarion Corp.

	Gross		Passive Investment		Corporate Earnings
Year	Receipts		Income		and Profits
1	$	1,353,958	$	252,500	$	321,600
2	$	1,230,789	$	102,500	$	321,600
3	$	1,140,306	$	302,500	$	231,000
4	$	1,347,663	$	352,500	$	100,600
5	$	1,500,860	$	402,500	$	0

b. Hanson Corp.

	Gross		Passive Investment		Corporate Earnings
Year	Receipts		Income		and Profits
1	$	1,430,600	$	249,400	$	138,379
2	$	700,780	$	202,400	$	100,400
3	$	849,540	$	191,200	$	100,400
4	$	830,660	$	212,400	$	80,300
5	$	1,000,905	$	259,790	$	80,300

c. Tiffany Corp.

	Gross		Passive Investment		Corporate Earnings
Year	Receipts		Income		and Profits
1	$	1,001,138	$	251,800	$0
2	$	703,500	$	302,280	$0
3	$	800,745	$	402,170	$0
4	$	900,630	$	352,270	$0
5	$	671,000	$	292,177	$0

d. Jonas Corp.

	Gross		Passive Investment		Corporate Earnings
Year	Receipts		Income		and Profits
1	$	1,100,950	$	252,000	$530
2	$	998,100	$	241,000	$430
3	$	800,650	$	232,000	$330
4	$	803,500	$	216,570	$230
5	$	750,600	$	202,000	$130

would the S election be terminated?when?

Answer 1

S corporations will terminated because of excessive income.

S Election will got terminated because of excessive passive income if its passive investment income surpasses 25% of gross receipts for 3 successive years and has accumulated E&P from the period when it operated as C Corporation.

a) Clarion corporations

because of excessive passive income if its passive investment income surpasses 25% of gross receipts for 3 successive years and has accumulated E&P from the period when it operated as C Corporation.

Year	Gross receipts	passive income	passive income%	%calculation	corporate earnings
1	$1,353,958	$252500	18.64%	($252500/$1353958)*100	$321,600
2	$1230789	$102500	8.33%	($102500/$1230789)*100	$321600
3	$1140306	$302500	26.53%	($302500/$1140306)*100	$321000
4	$1347663	$352500	26.16%	($352500/$1347663)*100	$100600
5	$1500860	$402500	26.82%	($402500/$1500860)*100	$0

C corporations has more investment income for more then 3 years i.e. more than 25%. But it doesn't have any earnings in 5th year so, the s corporations not get terminated.

b) Hanson corporations

Years	Gross receipts	passive income	calculation	passive income%	corporate earnings
1	$1480600	$249400	($249400/$1480600)*100	16.84%	$138379
2	$700780	$202400	($202400/$700780)*100	28.88%	$100400
3	$849540	$191200	($191200/$849540)*100	22.51%	$100400
4	$830660	$212400	($212400/$830660)*100	25.57%	$80300
5	$1000905	$259790	($259790/$1000905)*100	25.96%	$80300

As like the first one this one also has the same 3 or more years more than 25%

c)Tifanny corporations

Year	Gross receipts	passive income	passive income%	calculation	corporate earnings
1	$1001138	$251800	25.15%	($251800/$1001138)*100	$0
2	$703500	$302280	42.97%	($302280/$703500)*100	$0
3	$800745	$402170	50.22%	($402170/$800745)*100	$0
4	$900630	$352270	39.11%	($352270/$900630)*100	$0
5	$671000	$292177	43.54%	($292177/$671000)*100	$0

The s election terminated on the T corporations as this year the t corporations has excessive passive income in all the five years and the corporate earnings are $0 for each year

d) Jonas corporations

Years	Gross receipts	passive income	passive income%		corporate earnings
1	$1100950	$252000	22.89%		$530
2	$998100	$241000	24.15%		$430
3	$800650	$232000	28.98%		$330
4	$803500	$216570	26.95%		$230
5	$750600	$202000	26.91%		$130

By considering all the above cases in the part of Tifanny corporations the s election would be terminated.