A corporation may alternate between S corporation and C corporation status each

Question

A corporation may alternate between S corporation and C corporation status each year, depending on which results in more tax savings. a. True b. False 2. If the IRS reclassifies debt as equity under § 385, the repayment of the debt by the corporation to the shareholder is treated as a dividend, assuming adequate E & P. a. True b. False 3. Dave contributes land (adjusted basis of $30,000; fair market value of $100,000) to Tan, Inc., in exchange for all of its stock. The land is encumbered by a mortgage of $27,000 which Tan assumes. Since the transaction qualifies for nonrecognition treatment under § 351, Tan’s adjusted basis for the land is $3,000 ($30,000 – $27,000) and Dave’s adjusted basis for the stock is $3,000. a. True b. False 4. Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Carol contributes cash of $100,000 for the other 50% of the stock. If White later sells the land for $110,000, $35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 x 50%) is allocated to Carol. a. True b. False 5. To the extent of built-in gain at the time of contribution, partnerships may choose to allocate or not allocate gain on the sale of contributed property to the contributing partner. a. True b. False 6. Wally contributes land (adjusted basis of $30,000; fair market value of $100,000) to a C corporation in a transaction which qualifies under § 351. The corporation subsequently sells the land for $120,000, recognizing a gain of $90,000 ($120,000 – $30,000). If Wally owns 30% of the stock, $76,000 [$70,000 + 30%($20,000)] of the $90,000 recognized gain is allocated to Wally. a. True b. False 7. The profits of a business owned by Taylor (60%) and Maggie (40%) for the current tax year are $100,000. If the business is a C corporation, there is no effect on Taylor’s basis in her stock. If the business is a partnership or an S corporation, Taylor’s basis in her partnership interest or basis in her stock is increased by $60,000. a. True b. False 8. Rose, an S corporation, distributes land to Walter, its only shareholder. Rose’s adjusted basis for the land is $100,000, and the fair market value is $225,000. Rose has a recognized gain of $125,000 ($225,000 – $100,000) on the distribution. Walter’s adjusted basis for the land is the fair market value of $225,000. a. True b. False 9. Samantha’s basis for her partnership interest is $112,000. If she receives a cash distribution of $95,000, her recognized gain is $0 and her basis for her partnership interest is reduced to $17,000. Samantha is still a partner after the distribution. a. True b. False 10. Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation. a. True b. False

Explanation / Answer

1) A corporation may alternate between S corporation and C corporation status each year, depending on which results in more tax savings. a. True b. False
A corporation can't alternate the status each year because C corporation is a separate entity from its owner and that are subject to the corporate income tax and S corporation that have filed a special election with the IRS.
2) If the IRS reclassifies debt as equity under § 385, the repayment of the debt by the corporation to the shareholder is treated as a dividend, assuming adequate E & P. a. True b. False
In this situation, the repayment of the debt by the corporation is treated as a dividend only to the extent of E & P. Otherwise, the debt repayment is treated as a return of capital.
3) 3. Dave contributes land (adjusted basis of $30,000; fair market value of $100,000) to Tan, Inc., in exchange for all of its stock. The land is encumbered by a mortgage of $27,000 which Tan assumes. Since the transaction qualifies for nonrecognition treatment under § 351, Tan’s adjusted basis for the land is $3,000 ($30,000 – $27,000) and Dave’s adjusted basis for the stock is $3,000. a. True b. False

Tan’s adjusted basis for the land is $30,000, the same as Dave’s adjusted basis prior to the transfer. Dave’s adjusted basis for the stock is $3,000 ($30,000 – $27,000).
4) 4. Amos contributes land with an adjusted basis of $70,000 and a fair market value of $100,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Carol contributes cash of $100,000 for the other 50% of the stock. If White later sells the land for $110,000, $35,000 [$30,000 + 50%($10,000)] is allocated to Amos and $5,000 ($10,000 x 50%) is allocated to Carol. a. True b. False
Amos Land = $100,000 - 70,000 = $30,000
Carol Land = $110,000 - 100,000 = $10,000
Recognized Gain = $40,000
Special allocations apply to partnerships and not to S corporations. The $40,000 recognized gain is allocated  based on stock ownership; that is, $20,000 to Amos and $20,000 to Carol

5) 5. To the extent of built-in gain at the time of contribution, partnerships may choose to allocate or not allocate gain on the sale of contributed property to the contributing partner. a. True b. False
Partnerships are required to make such an allocation under § 704(c).

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