Lockhart Corporation is a calendar-year corporation.

| September 28, 2018

Critical Thinking: S-Corporation

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).

1. During 2013, Lockhart sold the
entire inventory it owned at the beginning of the year for $250,000. What is
its

built-in gains tax in 2013? Be sure to
show your work.

2. 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.

3. 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.

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