S Corporation elected S corporation status beginning in 2001 and will have Subchapter C earnings and profits at the close of the current taxable year. This year, S expects that its business operations and investments will produce the following tax results:

Gross income from operations $75,000

Business deductions 60,000

Tax-exempt interest 23,000

Dividends 12,000

Long-term capital gain from the sale of investment

real property 35,000

a. Is S Corporation subject to the Section 1375 tax on passive investment income? If so, compute the amount of tax.

b. Same as (a), above, except that S receives an additional $5,000 of tax-exempt interest.

The focus is Section 1375 tax on an S corp.