Question

1-what are the limitations on the number and type of shareholders an Corporation may have? how are these limitations different from restrictions on the number and type of shareholders C corporations or partnerships may have? 

2- Karen is the sole shareholder of a calendar year end C corporation she formed last year. if she elects S corporation status this year on February 20, when will the election become effective and why? what if she had made the election on March 20? 

3- describe a situation in which a former C corporation that elected to be taxed as an S corporation may have its S election automatically terminated, but a similarly situated corporation that has always been taxed as an S corporation would not. 

4- on June 1 year 1 jasper corporation’s S election was involuntarily terminated. what is the earliest jasper may be taxed as an S corporation again? are there any exceptions to the general rule? Explain . 

5- why is shareholder’s basis in an S corporate stock adjusted annually? 

6- how does a shareholder  create debt basis in an S corporation? how is debt basis similar and dissimilar to stock basis? 

7- when and S corporation shareholder has suspended losses due to the tax basis or at risk amount limitation, is he allowed to deduct the losses if the Corporation status is terminated? why or why not? 

8 - how does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation? 

9- How do the tax consequences of S Corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels? 

10- is the LIFO recapture tax a C corporation tax or an S corporation tax? Explain. 

Answer 1

(1)=> Only U.S. citizens or residents, certain trusts, and certain tax-exempt organizations may be shareholders, no corporations or partnerships. In addition, S corporations may have no more than 100 shareholders; family members and their estates count as one.

==>> C corporations and partnerships do not have a limit on the amount or type of shareholders or partners.

(2)=> January 1, current year; since the election was made on or before the 15th day of the third month of the year the status can take effect as of the beginning of the year. If Karen had waited until March 20th , the election would not take effect until the beginning of the next year.

(3) =>The S election is terminated when an S corporation has earnings and profits from prior C corporation operations and has passive investment income in excess of 25 percent of gross receipts for three consecutive years. The S election termination for excess passive investment income does not apply to an S corporation that has never been taxed as a C corporation.

(4)=> Jan 1, year 6 would be the earliest that Jasper Corporation could reelect S corporation status. After terminating or voluntarily revoking S corporation status, the corporation must wait to reelect S corporation status until the beginning of the fifth tax year after the tax year in which it terminated the election.

The IRS may consent to an earlier election under a couple of conditions:

(1) if the corporation is now owned more than 50 percent by shareholders who were not owners at the time of termination, or ,

(2) if the termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.