Answer the following statements true (T) or false (F)
1. When an S corporation shareholder sells her stock, she must first recognize ordinary gain to the extent of her share of the unrealized receivables and appreciation on inventory held by the S corporation, with the balance of the gain treated as capital gain.
2. New business owners expecting losses in the early years will generally prefer the partnership (or LLC) form of business over the C and S corporation forms.
3. Eva is the sole shareholder of an S corporation. Eva gifts half of her S corporation stock to Adam, her newborn son. The S corporation is a highly profitable manufacturing company. The pass-through of the ordinary income to Adam can be subject to tax at his parents' marginal rate.
4. Realto LLC is a tax partnership which has four equal partners. The LLC holds highly appreciated real estate in midtown Manhattan. Trina is about to purchase a 20% ownership interest in the LLC. To minimize her future tax burden as a partner, she should negotiate a Sec. 754 election with the current partners.
5. Assuming extensions are not filed, tax returns for calendar-year S corporations and partnerships are both due on April 15.
1. FALSE
Sec. 751 recapture applies to sales of partnership interests, not to sales of S corporation stock.
2. TRUE
In the C corporation form, the losses do not flow through to the owners. While the losses do flow through to owners of the S corporation, basis limitations are more likely to limit the recognition of the losses because liabilities are not included in S stock basis.
3. TRUE
While the gift will be respected, Adam does not work in the business so the ordinary income pass-through will be unearned income subject to the kiddie tax to the extent his unearned income exceeds the annual threshold.
4. TRUE
If the assets are highly appreciated, her partnership interest will cost more than her share of the partnership assets. If the partnership makes a Sec. 754 election, she will be allocated higher depreciation deductions.
5. FALSE
The S corporation and partnership returns are both due March 15.
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