SEC Corporation Has Been Operating as a C Corporation Since

question 87

Essay

SEC Corporation has been operating as a C corporation since 2016.It elected to become an S corporation, effective January 1, 2019.On December 31, 2018, SEC reported a net unrealized built-in gain of $10,000.In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019).At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000.SEC sold the inventory for $28,000.If SEC had been a C corporation in 2019, its taxable income would have been $40,000.How much built-in gains tax must SEC pay in 2019? Assume the corporate tax rate is 21%.

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Definitions:

Dishonored

Refused; specifically, a payment that has been refused despite a holder presenting an instrument in a timely and proper manner.

Holder in Due Course

A legal term referring to a person who has acquired a negotiable instrument in good faith and for value, and thus has certain protections against defenses and claims that could be raised by prior parties.

Transfer Warranties

Guarantees provided by a seller to a buyer regarding the condition and legality of the item or property being transferred.

Endorsement

The act of signing one's name on the back of a financial instrument, such as a check, thereby transferring rights or title to another party.