Question

Betty has formed Bicycle Fish, Inc., a California S corporation, of which Betty is the majority shareholder. It’s been a mixed year. First, Bert sued the Fish for breach of contract. Second, the Fish had profits, but Betty was forced to leave them in the corporation’s operating account. What are the consequences of these two things for the corporation?

Select one:

a. No contractual liability; no tax liability for profits

b. No contractual liability; tax liability for profits

c. Contractual liability; no tax liability for profits

d. Contractual liability; tax liability for profits

Answer 1

Option d Contractual liability; tax liability for profits

As Fish Inc was sued by Bret for breach of contract hence it has contractual liability . As fish has not performed his part of the contract he has contractual liability.

As there is operating income and profits are taxable hence fish Inc has tax liability also

If any doubt please comment