Pankee Inc., was originally formed as a C corporation and made an S election 5 y
ID: 2464963 • Letter: P
Question
Pankee Inc., was originally formed as a C corporation and made an S election 5 years ago. Which of the following statements correctly describes the taxability of Pankee's distributions to its shareholders? A distribution to the shareholders will be taxable to the shareholders, if it is treated as coming from the S corporation's accumulated adjusted account and represents an amount already taxed to the shareholders. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation's accumulated adjusted account and represents an amount already taxed to the shareholders. A distribution to the shareholders will be nontaxable to the shareholders, if it is treated as coming from the S corporation's accumulated earnings and profits, earned during its years as a C corporation. A distribution to the shareholders will be nontaxable to the shareholders regardless of whether it is treated as coming from the S corporation's accumulated adjusted account or its accumulated earnings and profits.Explanation / Answer
The answer is option C. Since the co. has originally incorporated as C corporation. So anything earned during its operation as C corporation had already been taxed under relevant laws. When co. changes its selection as S corporation, the already taxed profits (which it had earned during its operations as C corporatin and been taxed onthe same) would not be taxed again under its S selection.
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