Federal Taxation Week 6
Federal Taxation
2/10/2013
Questions: 21-2, 21-13, & 21-26
Problems: 21-53 & 21-63
Homework Week Six
21-2. What are the eligibility requirements that a corporation must meet in order to qualify under Subchapter S?
Answer: In order to qualify under Subchapter S, a corporation must be a small business corporation. The following additional requirements must be met in order to be a small business corporation:
1. Must be a domestic corporation
2. Must have no more than 100 shareholders
3. Must include only eligible shareholders
4. Must have only one class of stock
5. Must not be an ineligible corporation
(Smith 21-3) Smith, Harmelink & Hasselback. Federal Taxation: Comprehensive Topics. CCH, 2013.
21-13. What limits are placed on the selection of a tax year of an S corporation? How do these limits differ from those applicable to C corporations and partnerships?
Answer: S corporation status must be elected by all of the shareholders of the corporation. Code Sec. 1362(a)(2). An election made on or before the fifteenth day of the third month of a corporation's tax year is effective beginning with the year when made. Code Sec. 1362(b)(1). For a newly created corporation, the first tax year begins at the earliest occurrence of any of the following events: (1) when the corporation has shareholders, (2) when it acquires assets, or (3) when it begins doing business.
The corporation must meet all the eligibility requirements (including shareholder eligibility requirements) for the pre-election portion of the tax year. All persons who held stock in the corporation at any time during the portion of the year before the election was made must consent to the election. Reg. §1.1362-2(b)(1). However, a person who becomes a shareholder after the corporation is an S corporation does not have to consent to the election. A new shareholder does not have the power to terminate the election unless that shareholder owns more than 50 percent of the stock and
2/10/2013
Questions: 21-2, 21-13, & 21-26
Problems: 21-53 & 21-63
Homework Week Six
21-2. What are the eligibility requirements that a corporation must meet in order to qualify under Subchapter S?
Answer: In order to qualify under Subchapter S, a corporation must be a small business corporation. The following additional requirements must be met in order to be a small business corporation:
1. Must be a domestic corporation
2. Must have no more than 100 shareholders
3. Must include only eligible shareholders
4. Must have only one class of stock
5. Must not be an ineligible corporation
(Smith 21-3) Smith, Harmelink & Hasselback. Federal Taxation: Comprehensive Topics. CCH, 2013.
21-13. What limits are placed on the selection of a tax year of an S corporation? How do these limits differ from those applicable to C corporations and partnerships?
Answer: S corporation status must be elected by all of the shareholders of the corporation. Code Sec. 1362(a)(2). An election made on or before the fifteenth day of the third month of a corporation's tax year is effective beginning with the year when made. Code Sec. 1362(b)(1). For a newly created corporation, the first tax year begins at the earliest occurrence of any of the following events: (1) when the corporation has shareholders, (2) when it acquires assets, or (3) when it begins doing business.
The corporation must meet all the eligibility requirements (including shareholder eligibility requirements) for the pre-election portion of the tax year. All persons who held stock in the corporation at any time during the portion of the year before the election was made must consent to the election. Reg. §1.1362-2(b)(1). However, a person who becomes a shareholder after the corporation is an S corporation does not have to consent to the election. A new shareholder does not have the power to terminate the election unless that shareholder owns more than 50 percent of the stock and