Comprehensive Problem 17-84 (LO 17-1, LO 17-2, LO 17-3, LO 17-4, LO 17-5, LO 17-6)

Barry Potter and Winnie Weasley are considering making an S election on March 1, 2019, 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, 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.

Omniocular is not eligible to elect S corporation status.

For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2019. Barry and Winnie each own 50 percent of the voting power and have 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, 2018, were $55,000.
• Omnioculars 2018 taxable income was $15,000.
• Omnioculars assets at the end of 2018 are as follows:

Omniocular Assets
December 31, 2018
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, 2019, Omniocular sold the land for $42,000.
• In 2019, 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 2019
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 2019, its taxable income would have been $88,500.

Skip question A

B. How much LIFO recapture tax (in total) is Omniocular required to pay and when is the first installment due? As per new tax rule, the corporate tax rate is 21%

C. How much built-in gains tax, if any, is Omniocular required to pay?

D. How much excess net passive income tax, if any, is Omniocular required to pay?

E. Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2019. What is his stock basis on December 31, 2019?

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, 2020.

• In 2020, Omniocular reported the following income/expense items:

	January 1July 31, 2020 (213 days)				August 1December 31, 2020 (153 days)				January 1December 31, 2020
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

Skip question F

G. Assume 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, 2020, is $50,000, what is his stock basis on December 31, 2020? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)