Problem:
Lockhard Corporation is a calendar-year corporation. At the beginning of 2013, its election to be taxes as an S Corporation became effective. Lockhard 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 |
Lockharts business income for the year was $65,000 (this would have been its taxable income if it were a C corporation).
Required:
Question 1: During 2013, Lockhard sold all of the inventory it owned at the beginning of the year for $250,000. What is its built-in gains tax in 2013? Please show work.
Question 2: Assume the same facts as in part (1), except that if Lockhard were a C corporation, its taxable income would have been $17,000. What is its built-in gains tax in 2013? Pleas show work.
Question 3: Assume the original facts except the land was valued at $115, 000 instead of $120,000. What is Lockhards built-in gains tax in 2013? Please show work.
Note: Please show how to work it out.