What is the solution to this problem?

Barry Potter and Winnie Weasley are considering making an S election on March 1, 2015, for their C corporation, Omniocular. However, first they want to consider the implications of the following information: (Round your intermediate dollar calculations and final answer to the nearest whole dollar amount.)

	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.

a.

Is Omniocular eligible to elect S corporation status?

	Yes
	No

For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2015. 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, 2014, were $55,000.
	Omnioculars 2014 taxable income was $15,000.
	Omnioculars assets at the end of 2014 are as follows:

Omniocular Assets December 31, 2014
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, 2015, Omniocular sold the land for $42,000.
	In 2015, 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 2015
Sales revenue	$	155,000
Salary to owners	$	(50,000)
Employee wages	$	(10,000)
Depreciation expense	$	(5,000)
Miscellaneous expenses	$	(1,000)
Gain on sale of machinery	$	12,000
Interest income	$	40,000
Dividend income	$	65,000

Assume that if Omniocular were a C corporation for 2015, its taxable income would have been $88,500.

b.	How much LIFO recapture tax is Omniocular required to pay and when is it due?

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, 2015. What is his stock basis on December 31, 2015?

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, 2016.

In 2016, Omniocular reported the following income/expense items:

	January 1July 31 2016 (213 days)			August 1December 31, 2016 (153 days)			January 1December 31, 2016
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

f.

For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omnioculars income?

	Daily method
	Specific identification method

g.	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, 2016, is $50,000, what is his stock basis on December 31, 2016?

h.

When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

	January 1, 2021
	January 1, 2015
	January 1, 2014