Question

Lockhart Corporation is a calendar-year corporation. At the beginning of 2013, its election to be taxed as an S corporation became effective. Lockhart Corp.'s balance sheet at the end of 2012 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation):

Asset	Adjusted Basis	FMV
Cash	$35,000	$35,000
Accounts receivable	?25,000	?25,000
Inventory	180,000	?210,000
Land	?125,000	?120,000
Totals	$365,000	$390,000

Lockhart's business income for the year was $65,000 (this would have been its taxable income if it were a C corporation).

During 2013, Lockhart sold all of the inventory it owned at the beginning of the year. What is its built-in gains tax in 2013? Be sure to show your work.

Assume the same facts as in part (1), except that if Lockhart were a C corporation, its taxable income would have been $17,000. What is its built-in gains tax in 2013? Be sure to show your work.

Assume the original facts except the land was valued at $115,000 instead of $120,000. What is Lockhart's built-in gains tax in 2013? Be sure to show your work.     

In your analysis, include the following:

An introduction

Requirements (don’t forget to show your work)

Conclusion

Answer 1

the s company that was formerly a company sells an appreciated assets and the apperciation

occurred during the time the corporation was a c corporation the s corporation will probably

pay c corporation taxes on the appreciation even though the corporation is now an s corporation

1 ) built in gain tax rate is 35 %

built in gain tax = 250000 - 210000 * 35 %

= 14000

2 ) if lockhart were a c corporation it has to pay tax on its taxable income of 17000 plus tax and inventor

built in gain tax = 250000 - 180000 + 17000

= 87000 * 35 %

3 ) if a s corporation is convected from c corporation taxes to be paid only when the appreciated value is

realized the land value is deperication no build in gain taxes to be paid