a. The Theodore Corporation was formed by Ted five years ago as the sole shareholder and operated for several years as a C corporation. At the beginning of the current year, The Theodore Corporation made the election to be treated as an S corporation and operated as an S corporation during the current year. At the beginning of the current year, when The Theodore Corporation began operating as an S corporation, the corporation had no current or accumulated earnings and profits. On December 31 of the current year, The Theodore Corporation made a distribution to Ted of $25,000. At the time of that distribution, Teds basis in his stock was $20,000.

i What are the tax consequences of the distribution to Ted?

ii. Using the facts presented above except that when the conversion was made from C corporation status to S corporation status, The Theodore Corporation had $15,000 in accumulated earnings and profits, what are the tax consequences of the distribution to Ted?

b. There are 100 unrelated shareholders in Big Old Corporation which has operated for a number of years as an S corporation. Robert, one of those shareholders, is considering selling his stock in the corporation. Which of the following scenarios will terminate the S election for the corporation of the corporation? Explain why or why not.

i. Robert wants to liquidate some of his stock so he can invest in other companies but he wants to maintain some ownership in Big Old Corporation, so he is considering selling some of his shares to a friend.

ii. Robert wants to liquidate some of his stock so he can invest in other companies but he wants to maintain some ownership in Big Old Corporation, so he is considering selling some of his shares to his brother

iii. Robert wants to liquidate some of his stock so he can invest in other companies but he wants to maintain some ownership in Big Old Corporation, so he is considering selling some of his shares to a corporation owned by his father.