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.