#3 Discussion Question 22-7 (LO. 4)

Caleb calls you and says that his two-person S corporation was involuntarily terminated in February 2021. He asks you if they can make a new S election now, in November 2022.

Complete the memo for the file regarding this situation.

TAX FILE MEMORANDUM

Date: November 24, 2022

From: Ryne Vorhies

Subject: Involuntary Termination of Two-Person S CorporationCaleb, Shareholder.

I told Caleb by e-mail that after an election has been terminated, (one year, three years, five years, ten years) must pass before a new election can be made. Theoretically, Caleb must wait until (2022, 2024, 2027, 2030) before a new election is available. Code 1362(f) allows the IRS to make exceptions to this rule and permits an earlier election in the following two situations.

. There is a (more-than-10%, more-than-25%, more-than-50%, more-than-80%) change in ownership (after, before, during) the first year for which the termination is applicable.

. The event causing the termination (was, was not) reasonably within the control of the S corporation or its majority shareholders.

Thus, Caleb may have a chance of (a hardship exception, an early election).

#8 Problem 22-22 (LO. 7)

Lonergan, Inc., a calendar year S corporation in Athens, Georgia, had a balance in AAA of $200,000 and AEP of $110,000 on December 31, 2022. During 2023, Lonergan, Inc., distributes $140,000 to its shareholders, while sustaining an ordinary loss of $120,000.

Calculate the balance in Lonergan's AAA and AEP accounts at the end of 2023.

If required, use the minus sign to indicate a negative balance.

Ending balance in the AAA account: $ _________________

Ending balance in the AEP account: $ _________________

#11 Problem 22-25 (LO. 5, 6, 7)

McLin, Inc., is a calendar year S corporation. Its AAA balance is zero. Determine the tax aspects of the following transactions.

If an amount is zero, enter "0".

a. McLin holds $90,000 of AEP. Tobias, the sole shareholder, has an adjusted basis of $80,000 in his stock. Tobias is paid a $90,000 salary. Ignore the 20% QBI deduction.

Tobias recognizes $90,000 of (capital gains, recovery of capital, ordinary income). The corporation reports a $__________ deduction that passes through to Tobias. Tobias' stock basis is $__________ and he holds a $__________ loss carryover.

b. McLin holds $90,000 of AEP. Tobias, the sole shareholder, has an adjusted basis of $80,000 in his stock. McLin pays Tobias a $90,000 cash distribution from AEP.

Tobias recognizes $__________ of (capital gains, recovery of capital, dividend income).) with (a, no, some) deduction pass-through and has a $__________ stock basis. AEP is $__________.

#12 Problem 22-35 (LO. 7, 8, 9)

At the beginning of the tax year, Lizzie holds a $10,000 stock basis as the sole shareholder of Spike, Inc., an S corporation. During the year, Spike reports the following:

Net taxable income from sales $25,000

Net short-term capital loss (18,000)

Cash distribution to Lizzie, 12/31 15,000

If an amount is zero, enter "0".

a. Determine Lizzie's stock basis at the end of the year. $

$__________

b. Lizzie's $15,000 cash distribution is (fully taxable, fully tax-free, part taxable and part tax-free).

c. $__________ of the short-term capital loss is suspended this year.

#15 Problem 22-32 (LO. 7, 8, 9)

Mary is a shareholder in CarrollCo, a calendar year S corporation. At the beginning of the year, her stock basis is $10,000, her share of the AAA is $2,000, and her share of corporate AEP is $6,000.

At the end of the year, Mary receives from CarrollCo a $6,000 cash distribution. Mary's share of S corporation items includes a $2,000 long-term capital gain and a $10,000 ordinary loss.

Determine the effects of these events on Mary's share of the entity's AAA, her stock basis, and CarrollCo's AEP.

If an item has no effect or an amount is zero, enter "0". Enter amounts as positive numbers. However, use the minus sign to indicate if a "balance" amount is negative.