Question
Barry Potter and Winnie Weasley are considering making an S election on March 1, 2021, for their C corporation, Omniocular. However, first they want to
Barry Potter and Winnie Weasley are considering making an S election on March 1, 2021, 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 owns 50 percent of the voting power in Omniocular. However, Barrys 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.
For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2021. Barry and Winnie each owns 50 percent of the voting power and has an equal claim on Omnioculars assets in liquidation. In addition, consider the following information:
- Omniocular reports on a calendar tax year.
- Omnioculars earnings and profits as of December 31, 2020, were $55,000.
- Omnioculars 2020 taxable income was $15,000.
- Omnioculars assets at the end of 2020 are as follows:
Omniocular Assets | ||||||
December 31, 2020 | ||||||
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 | * | 125,000 | |||
Equipment | 40,000 | 35,000 | ||||
Totals | $ | 980,000 | $ | 1,030,000 | ||
*$110,000 under FIFO accounting.
- On March 31, 2021, Omniocular sold the land for $42,000.
- In 2021, 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/Expense Items for 2021 | |||
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 2021, its taxable income would have been $88,500.
1) Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2021. What is his stock basis on December 31, 2021?
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 Omnioculars S election, effective August 1, 2022.
- In 2022, Omniocular reported the following income/expense items:
January 1July 31, 2022 (212 days) | August 1December 31, 2022 (153 days) | January 1December 31, 2022 | |||||||||
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 | ||||
2) 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 Barrys stock basis in his Omniocular stock on January 1, 2022, is $50,000, what is his stock basis on December 31, 2022?
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