S Corporation elected S corporation status beginning in 2001 and will have Subchapter C earnings and profits at the close of the current taxable year. This year, S expects that its business operations and investments will produce the following tax results:
Gross income from operations $75,000
Business deductions 60,000
Tax-exempt interest 23,000
Dividends 12,000
Long-term capital gain from the sale of investment
real property 35,000
a. Is S Corporation subject to the Section 1375 tax on passive investment income? If so, compute the amount of tax.
b. Same as (a), above, except that S receives an additional $5,000 of tax-exempt interest.
The focus is Section 1375 tax on an S corp.