“An S corporation can have either a C corporation or an S corporation as a wholly-owned subsidiary but cannot itself be a corporate subsidiary.”
Is the above statement true or false? Or partly true / partly false? Explain in 3-4 sentences.
(2)
Greenacre, Inc., is a for-profit Texas corporation with 20 individual (human) shareholders. Greenacre’s certificate of formation authorizes it to issue both common and preferred stock. At incorporation in 2012 Greenacre issued 100,000 shares of common stock plus 10,000 shares of preferred stock. Later, in 2018, Greenacre redeemed all of its issued and outstanding preferred stock and since has held those shares as treasury stock. Is Greenacre eligible to make an S elec-tion in 2021? Explain why or why not in 3-4 sentences.
(3)
ABC Corp., a going-concern C corporation, decided to make a midstream S election two years ago. On the effective date of its S election ABC owned only a single asset, one with a FMV of $100,000 and adjusted basis of $40,000. Consid-er and respond to the following two scenarios (worth one point each) regarding ABC’s arm’s-length sale of that same asset in April 2021…
1. The asset, with an adjusted basis of $10,000, was sold for $60,000.
2. The asset, with an adjusted basis of $25,000, was sold for $15,000.
In each of those two scenarios, state and explain how much BIG (built-in gain), if any, ABC must recognize and pay tax on?