Prior to January 1, 2022, Video Corp was a C corporation and used the cash method of
Question:
Prior to January 1, 2022, Video Corp was a "C" corporation and used the cash method of accounting (except for inventory). Video Corp both sells inventory and provides services. In accounting for inventory, the FIFO method is used. Through 2021, Video Corp has accumulated deficit in E&P of (100,000) and an NOL carryforward of (100,000).
Effective January 1, 2022, Video Corp elected to be an S Corp. Its assets as of the end of 2021 were as follows:
Tax Balance Sheet at 12/31/2021
Assets Fair market value Adjusted Basis
Cash $ 100,000 $ 100,000
Accounts Receivable- sale of inventory $ 400,000 $ 400,000
Accounts Receivable - services $ 300,000 $ 0
Inventory $ 300,000 $ 200,000
Equipment $ 100,000 $ 300,000
Leasehold Improvements $ 200,000 $ 400,000
Land $ 300,000 $ 400,000
Goodwill $ 400,000 none
$2,100,000 $1,800,000
2022 Results
During 2022 the entire inventory of 200,000 owned on December 31, 2021 was sold for 400,000, receivables from services of $300,000 owed on December 31, 2021 were collected, and the corporation sold the equipment of 300,000 owned on December 31, 2021 for 100,000. The corporation's taxable income including the above items was $300,000.
ASSUME THE CORPORATION ELECTED S CORP STATUS IN 2022.
DETERMINE WHETHER THE CORPORATION IS SUBJECT TO THE BUILT-IN GAIN TAX UNDER SECTION 1374 IN 2022. EXPLAIN WHY OR WHY NOT, AND IF SO, HOW MUCH IS SUBJECT TO TAX.
CITE ALL RELATED IRC CODE SECTIONS.
South-Western Federal Taxation 2020 Comprehensive
ISBN: 9780357109144
43rd Edition
Authors: David M. Maloney, William A. Raabe, James C. Young, Annette Nellen, William H. Hoffman