Subject: Business    / Accounting
Week 3 – Discussion Questions Worksheet (each question needs a minimum of a
175 word count answer)
1. Jeff and Louis own an S Corporation. Jeff and Louis own 50% of the corporation
each. Jeff’s S Corporation stock basis at the beginning of the year was $150,000.
Louis’ was $120,000. The company is reporting an ordinary loss of $285,000.
How can this loss affect Jeff’s tax liability? What about Louis’ tax liability?
2. Mary and Paul began a partnership 10 years ago that has been incredibly
successful. Mary and Paul own 50% of the partnership each. Mary and Paul’s
accountant has suggested that they incorporate as an S corp. To do so, the
partnership will exchange all its existing assets and liabilities for the new S Corp
stock on October 1 of the current year. The partnership will then liquidate by
distributing the acquired S Corp stock to Mary and Paul, in equal parts. What are
some of the most relevant tax implications of this transaction? Do you believe
Mary and Paul’s accountant is providing good advice?
3. Anna and Brandon own an S Corporation. Anna and Brandon own 50% of the
corporation each. Anna’s S Corporation stock basis at the beginning of the year
was $175,000. Brandon’s was $225,000. The company is reporting an ordinary
gain of $125,000 and will distribute land with a $85,000 adjusted basis and
$425,000 FMV. How can this gain affect Anna’s tax liability? What about
Brandon’s tax liability? What implications would this distribution have for each of
them? Please calculate the gain that will be reported by each Anna and Brandon.
4. Johnson Corporation is a C Corp that has been in business since 2000. The
corporation’s accountant, John Smith, has recommended converting from C
corporation status to S corporation status. Johnson Corporation has assets with
a $540,000 adjusted basis and an $800,000 fair market value. Liabilities are
$75,000. The corporation is owned solely by its founder, Ray Johnson. Currently,
Johnson Corporation uses accrual accounting and has selected a fiscal year
which ends on June 30. Do you believe the conversion to S status is
appropriate? What implications would it have on the corporation’s tax liability?
What about Ray Johnson’s personal tax liability?

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