Barry Porter and Winnie Weeks are considering making an S election on March 1, 2024, for their C corporation, Omniocular. However, first they want to consider the implications of the following information: Winnie is a U.S. citizen and resident. Barry is a citizen of the United Kingdom but a resident of the United States. Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry's stock provides him with a claim on 60 percent of the Omniocular assets in liquidation. Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico. Is Omniocular eligible to elect S corporation status? For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2024. Barry and Winnie each own 50 percent of the voting power and have an equal claim on Omniocular's assets in liquidation. In addition, consider the following information: Omniocular reports on a calendar tax year. Omniocular's earnings and profits as of December 31, 2023, were $55,000. Omniocular's 2023 taxable income was $15,000. Omniocular's assets at the end of 2023 are as follows: Omniocular Assets December 31, 2023 Asset Adjusted Basis FMV Cash $ 50,000 $ 50,000 Accounts receivable 20,000 20,000 Investments in stocks and bonds 700,000 700,000 Investment in land 90,000 100,000 Inventory (LIFO) 80,000*Footnote asterisk 125,000 Equipment 40,000 35,000 Totals $ 980,000 $ 1,030,000 *Footnote asterisk$110,000 under FIFO accounting. On March 31, 2024, Omniocular sold the land for $42,000. In 2024, Omniocular sold all the inventory it had on hand at the beginning of the year. This was the only inventory it sold during the year. Other Income or Expense Items for 2024 Sales revenue $ 155,000 Salary to owners (50,000) Employee wages (10,000) Depreciation expense (5,000) Miscellaneous expenses (1,000) Interest income 40,000 Qualified dividend income 65,000 Assume that if Omniocular were a C corporation for 2024, its taxable income would have been $88,500. How much LIFO recapture tax is (in total) is Omniocular required to pay, and when is the first installment due? How much built-in gains tax, if any, is Omniocular required to pay? How much excess net passive income tax, if any, is Omniocular required to pay? Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2024. What is his stock basis on December 31, 2024? For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular's S election, effective August 1, 2025. In 2025, Omniocular reported the following income or expense items: January 1—July 31, 2025 (212 days) August 1—December 31, 2025 (153 days) January 1—December 31, 2025 Sales revenue $ 80,000 $ 185,000 $ 265,000 Cost of goods sold (40,000) (20,000) (60,000) Salaries to Barry and Winnie (60,000) (40,000) (100,000) Depreciation expense (7,000) (2,000) (9,000) Miscellaneous expenses (4,000) (3,000) (7,000) Interest income 6,000 5,250 11,250 Overall net income (loss) $ (25,000) $ 125,250 $ 100,250 For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular's income? Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry's stock basis in his Omniocular stock on January 1, 2025, is $50,000, what is his stock basis on December 31, 2025? When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

Barry Porter and Winnie Weeks are considering making an S election on March 1, 2024, for their C corporation, Omniocular. However, first they want to consider the implications of the following information: Winnie is a U.S. citizen and resident. Barry is a citizen of the United Kingdom but a resident of the United States. Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry's stock provides him with a claim on 60 percent of the Omniocular assets in liquidation. Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico. Is Omniocular eligible to elect S corporation status? For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2024. Barry and Winnie each own 50 percent of the voting power and have an equal claim on Omniocular's assets in liquidation. In addition, consider the following information: Omniocular reports on a calendar tax year. Omniocular's earnings and profits as of December 31, 2023, were $55,000. Omniocular's 2023 taxable income was $15,000. Omniocular's assets at the end of 2023 are as follows: Omniocular Assets December 31, 2023 Asset Adjusted Basis FMV Cash $ 50,000 $ 50,000 Accounts receivable 20,000 20,000 Investments in stocks and bonds 700,000 700,000 Investment in land 90,000 100,000 Inventory (LIFO) 80,000Footnote asterisk 125,000 Equipment 40,000 35,000 Totals $ 980,000 $ 1,030,000 Footnote asterisk$110,000 under FIFO accounting. On March 31, 2024, Omniocular sold the land for $42,000. In 2024, Omniocular sold all the inventory it had on hand at the beginning of the year. This was the only inventory it sold during the year. Other Income or Expense Items for 2024 Sales revenue $ 155,000 Salary to owners (50,000) Employee wages (10,000) Depreciation expense (5,000) Miscellaneous expenses (1,000) Interest income 40,000 Qualified dividend income 65,000 Assume that if Omniocular were a C corporation for 2024, its taxable income would have been $88,500. How much LIFO recapture tax is (in total) is Omniocular required to pay, and when is the first installment due? How much built-in gains tax, if any, is Omniocular required to pay? How much excess net passive income tax, if any, is Omniocular required to pay? Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2024. What is his stock basis on December 31, 2024? For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular's S election, effective August 1, 2025. In 2025, Omniocular reported the following income or expense items: January 1—July 31, 2025 (212 days) August 1—December 31, 2025 (153 days) January 1—December 31, 2025 Sales revenue $ 80,000 $ 185,000 $ 265,000 Cost of goods sold (40,000) (20,000) (60,000) Salaries to Barry and Winnie (60,000) (40,000) (100,000) Depreciation expense (7,000) (2,000) (9,000) Miscellaneous expenses (4,000) (3,000) (7,000) Interest income 6,000 5,250 11,250 Overall net income (loss) $ (25,000) $ 125,250 $ 100,250 For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular's income? Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry's stock basis in his Omniocular stock on January 1, 2025, is $50,000, what is his stock basis on December 31, 2025? When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter15: S Corporations

Section: Chapter Questions

Problem 29P

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