1. \LO.2 Joey lives in North Carolina, a common law state. He is a shareholder in an S corporation. If he marries a citizen and resident of Germany, will the S election terminate? Would your answer change if he lived in Louisiana? Explain.

2. LO.6 Using the categories in the following legend, classify each transaction as a plus (+) or minus () on Schedule M2 of Form 1120S. An answer might look like one of these: +AAA or OAA.

Receipt of tax-exempt interest income.

a. Administrative expenses.

b. Depreciation recapture income.

c. Nontaxable life insurance proceeds.

d. Expenses related to tax-exempt securities.

e. Charitable contributions.

f. Business gifts in excess of $25.

g. Nondeductible fines and penalties.

3. LO.9 Sheila Jackson is a 50% shareholder in Washington, Inc., an S corporation. This year, Jacksons share of the Washington loss is $100,000. Jackson reports income from several other sources. Identify at least four tax issues related to the effects of the S corporation loss on Jacksons tax return.

4. LO.7, 12 Collettes S corporation holds a small amount of accumulated earnings and profits (AEP), thereby requiring the use of a more complex set of distribution rules. Collettes accountant tells her that this AEP requires the maintenance of the AAA figure each year. Discuss the issues that arise with respect to distributions when an S corporation holds AEP.

Legend AAA = Accumulated adjustments account OAA= Other adjustments account NA = No direct effect on ScheduleM-2