Barry Potter and Winnie Weasley are considering making an Selection on March 1, 2015, for their C corporation, Omniocular.However, first they want to consider the implications of thefollowing information: (Round your intermediate dollarcalculations and final answer to the nearest whole dollaramount.)
⢠Winnie is a U.S. citizen andresident. ⢠Barry is a citizen of the UnitedKingdom, but a resident of the United States. ⢠Barry and Winnie each own 50 percent of the voting power inOmniocular. However, Barryâs stock provides him with a claim on 60percent of the Omniocular assets in liquidation.
⢠Omniocular was formed under Arizona state law, but it plans oneventually conducting some business in Mexico.
a. Is Omniocular eligible to elect S corporation status?
Yes No
For the remainder of the problem, assume Omniocular made a validS election effective January 1, 2015. Barry and Winnie each own 50percent of the voting power and have equal claim on Omniocularâsassets in liquidation. In addition, consider the followinginformation:
⢠Omniocular reports on a calendar tax year.
⢠Omniocularâs earnings andprofits as of December 31, 2014, were $55,000. ⢠Omniocularâs 2014 taxable incomewas $15,000. ⢠Omniocularâs assets at the endof 2014 are as follows:
Omniocular Assets
December 31, 2014 Asset Adjusted Basis FMV Cash $ 50,000 $ 50,000 Accountsreceivable 20,000 20,000 Investments instocks and bonds 700,000 700,000 Investment inland 90,000 100,000 Inventory(LIFO) 80,000* 125,000 Equipment 40,000 35,000 Totals $ 980,000 $ 1,030,000
*$110,000 under FIFOaccounting.
⢠On March 31, 2015, Omniocularsold the land for $42,000. ⢠In 2015, Omniocular sold all the inventory it had on hand at thebeginning of the year. This was the only inventory it sold duringthe year.
Other Income/Expense Items for 2015 Sales revenue $ 155,000 Salary toowners $ (50,000) Employee wages $ (10,000) Depreciationexpense $ (5,000) Miscellaneousexpenses $ (1,000) Gain on sale ofmachinery $ 12,000 Interest income $ 40,000 Dividend income $ 65,000
⢠Assume that if Omniocular were a C corporation for 2015, itstaxable income would have been $88,500.
b. How much LIFO recapture tax is Omniocular required to pay andwhen is it due?
c. How much built-in gains tax, if any, is Omniocular required topay?
d. How much excess net passiveincome tax, if any, is Omniocular required to pay?
e. Assume Barry's basis in his Omniocular stock was $40,000 onJanuary 1, 2015. What is his stock basis on December 31, 2015?
For the following questions, assume that after electing Scorporation status Barry and Winnie had a change of heart and filedan election to terminate Omniocularâs S election, effective August1, 2016.
⢠In 2016, Omniocular reported the following income/expenseitems:
January 1âJuly 31
2016 (213 days) August 1âDecember 31,
2016 (153 days) January 1âDecember 31,
2016 Sales revenue $ 80,000 $ 185,000 $ 265,000 Cost of goodssold (40,000) (20,000) (60,000) Salaries to Barryand Winnie (60,000) (40,000) (100,000) Depreciationexpense (7,000) (2,000) (9,000) Miscellaneousexpenses (4,000) (3,000) (7,000) Interest income 6,000 5,250 11,250 Overall net income(loss) $ (25,000) $ 125,250 $ 100,250
f. For tax purposes, how would you recommend Barry and Winnieallocate income between the short S corporation year and the shortC corporation year if they would like to minimize double taxationof Omniocularâs income?
Daily method Specific identification method
g. Assume in part (f) that Omniocular allocates income between theshort S and C corporation years in a way that minimizes the doubletaxation of its income. If Barryâs stock basis in his Omniocularstock on January 1, 2016, is $50,000, what is his stock basis onDecember 31, 2016?
h. When is the earliest tax year inwhich Omniocular can be taxed as an S corporation again? January 1, 2021 January 1, 2015 January 1, 2014
Barry Potter and Winnie Weasley are considering making an Selection on March 1, 2015, for their C corporation, Omniocular.However, first they want to consider the implications of thefollowing information: (Round your intermediate dollarcalculations and final answer to the nearest whole dollaramount.) |
| ⢠| Winnie is a U.S. citizen andresident. |
| ⢠| Barry is a citizen of the UnitedKingdom, but a resident of the United States. |
| ⢠| Barry and Winnie each own 50 percent of the voting power inOmniocular. However, Barryâs stock provides him with a claim on 60percent of the Omniocular assets in liquidation. |
| ⢠| Omniocular was formed under Arizona state law, but it plans oneventually conducting some business in Mexico. |
| a. | Is Omniocular eligible to elect S corporation status? | ||||
|
For the remainder of the problem, assume Omniocular made a validS election effective January 1, 2015. Barry and Winnie each own 50percent of the voting power and have equal claim on Omniocularâsassets in liquidation. In addition, consider the followinginformation: |
| ⢠| Omniocular reports on a calendar tax year. |
| ⢠| Omniocularâs earnings andprofits as of December 31, 2014, were $55,000. |
| ⢠| Omniocularâs 2014 taxable incomewas $15,000. |
| ⢠| Omniocularâs assets at the endof 2014 are as follows: |
| Omniocular Assets December 31, 2014 | |||||
| Asset | Adjusted Basis | FMV | |||
| Cash | $ | 50,000 | $ | 50,000 | |
| Accountsreceivable | 20,000 | 20,000 | |||
| Investments instocks and bonds | 700,000 | 700,000 | |||
| Investment inland | 90,000 | 100,000 | |||
| Inventory(LIFO) | 80,000* | 125,000 | |||
| Equipment | 40,000 | 35,000 | |||
| Totals | $ | 980,000 | $ | 1,030,000 | |
| *$110,000 under FIFOaccounting. |
| ⢠| On March 31, 2015, Omniocularsold the land for $42,000. |
| ⢠| In 2015, Omniocular sold all the inventory it had on hand at thebeginning of the year. This was the only inventory it sold duringthe year. |
| Other Income/Expense Items for 2015 | ||
| Sales revenue | $ | 155,000 |
| Salary toowners | $ | (50,000) |
| Employee wages | $ | (10,000) |
| Depreciationexpense | $ | (5,000) |
| Miscellaneousexpenses | $ | (1,000) |
| Gain on sale ofmachinery | $ | 12,000 |
| Interest income | $ | 40,000 |
| Dividend income | $ | 65,000 |
| ⢠| Assume that if Omniocular were a C corporation for 2015, itstaxable income would have been $88,500. |
| b. | How much LIFO recapture tax is Omniocular required to pay andwhen is it due? |
| c. | How much built-in gains tax, if any, is Omniocular required topay? |
| d. | How much excess net passiveincome tax, if any, is Omniocular required to pay? |
| e. | Assume Barry's basis in his Omniocular stock was $40,000 onJanuary 1, 2015. What is his stock basis on December 31, 2015? |
For the following questions, assume that after electing Scorporation status Barry and Winnie had a change of heart and filedan election to terminate Omniocularâs S election, effective August1, 2016. |
| ⢠| In 2016, Omniocular reported the following income/expenseitems: |
| January 1âJuly 31 2016 (213 days) | August 1âDecember 31, 2016 (153 days) | January 1âDecember 31, 2016 | ||||||
| Sales revenue | $ | 80,000 | $ | 185,000 | $ | 265,000 | ||
| Cost of goodssold | (40,000) | (20,000) | (60,000) | |||||
| Salaries to Barryand Winnie | (60,000) | (40,000) | (100,000) | |||||
| Depreciationexpense | (7,000) | (2,000) | (9,000) | |||||
| Miscellaneousexpenses | (4,000) | (3,000) | (7,000) | |||||
| Interest income | 6,000 | 5,250 | 11,250 | |||||
| Overall net income(loss) | $ | (25,000) | $ | 125,250 | $ | 100,250 | ||
| f. | For tax purposes, how would you recommend Barry and Winnieallocate income between the short S corporation year and the shortC corporation year if they would like to minimize double taxationof Omniocularâs income? | ||||
|
| g. | Assume in part (f) that Omniocular allocates income between theshort S and C corporation years in a way that minimizes the doubletaxation of its income. If Barryâs stock basis in his Omniocularstock on January 1, 2016, is $50,000, what is his stock basis onDecember 31, 2016? |
| h. | When is the earliest tax year inwhich Omniocular can be taxed as an S corporation again? | ||||||
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