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Chapter C:11
S Corporations
Discussion Questions
C:11-1 Nine advantages of S corporation treatment are illustrated on text page C:11-3. Nine
disadvantages of S corporation treatment are illustrated on text pages C:11-3 and C:11-4.
C:11-2 Many items must be considered when converting a C corporation to an S corporation. Julio
must compare his and the corporation’s potential tax liabilities under both the C and S corporation
scenarios. His marginal tax rate is only slightly higher than the C corporation’s 21% tax rate, but his
dividend income also is taxed, albeit, at the applicable capital gains rate. If Julio elects S corporation
status, the entire amount of corporate income would be taxable to him regardless of whether the
corporation distributes it. Accordingly, much of the income would be taxed at the 32% to 35%
marginal rates, possibly necessitating increased cash distributions from the corporation to pay the
increased taxes. If Julio claims the 20% qualified business income deduction, these marginal tax
rates can be effectively reduced to 25.6% [32% x (1 - 0.20)] or 28% [35% x (1 - 0.20)]. However,
none of the $25,000 in dividends currently being paid would be subject to the double taxation under
the current C corporation status if the corporation made an S election. In addition, the income
passed through to Julio will step-up the basis of Julio’s S corporation stock. Such a basis step-up
does not occur with a C corporation. He also must consider the possible effect of the built-in gains
tax that could arise during the first five years after a C corporation converts to an S corporation.
Thus, Julio should make a thorough analysis of the short- and long-term benefits of S corporation
status including a comparison of the treatment of pensions and fringe benefits for each class of
corporation, and the potential estate planning considerations. Some of the advantages and
disadvantages of making an S election are outlined on pages C:11-3 and C:11-4.
C:11-3 Taxpayers must consider many items in making the decision regarding the initial tax form of
a business. The corporate (either C or S corporation) form offers the advantage of limited liability,
which is important for a new business. S corporations often are an attractive form for a new business
because the losses in the initial years pass through to the shareholder and offset any income that
Celia would earn from other sources. Then, in profitable years, the shareholder may be eligible for
the qualified business income deduction. The S corporation status can be terminated fairly easily, if
in the future C corporation status becomes more desirable. The noncorporate entity form known as a
limited liability company (LLC) also should be investigated. This business form provides the
limited liability benefits usually associated with a corporation, and it provides the tax benefits
associated with a partnership. Under the check-the-box regulations, an LLC also can elect to be
taxed as either a C corporation or an S corporation even if not organized as a corporation under
federal or state law. It may prove advantageous for an LLC to elect to be taxed as a C corporation.
An LLC probably would not want to elect to be treated as an S corporation because, in most
instances, it already is treated as a partnership under the check-the-box regulations without such an
election.
A thorough analysis of the short- and long-term tax advantages of the possible tax forms for
the business should be conducted before Celia makes a decision. Some of the advantages and
disadvantages of creating a corporation and making an S election are outlined on text pages C:11-3
and C:11-4.
Copyright © 2019 Pearson Education, Inc.
C:11-1
C:11-4 An LLC is treated as a partnership and therefore offers a number of advantages not available
with an S corporation. Some of the important advantages include:
• No restrictions are imposed on the type or number of owners that an LLC can have.
An S corporation is limited to 100 shareholders, none of which may be a corporation
or a partnership.
• Income and deduction allocations are based on the LLC agreement and not based on
the number of shares of stock owned. Thus, special income, gain, loss, and
deduction allocations are permitted for an LLC.
• The basis of the LLC interest includes a ratable share of the LLC’s liabilities. This
amount can be greater than the basis provided for the S corporation’s stock and
permits a greater loss or deduction pass-through.
• LLCs are not subject to the corporate level taxes (i.e., built-in gains tax, excess net
passive income tax, and LIFO recapture tax).
pp. C:11-3 and C:11-4 (also see Chapters C:2 and C:10).
C:11-5 b, c, and f. A domestic S corporation can be a shareholder in a Qualified Subchapter

S Subsidiary (QSub). pp. C:11-4 through C:11-7.
C:11-6 a. No. The passive income will not terminate the S election because the corporation has
no Subchapter C earnings and profits and has not generated excess passive income for three years.
b. Yes. The nonvoting stock would terminate the election because it has different
distribution rights and therefore constitutes a second class of stock. Different voting rights alone,
however, will not constitute a second class of stock if the stock possesses identical distribution and
liquidation rights as other voting stock.
c. No. Owning 100% stock of a subsidiary does not terminate the S election.
Moreover, the parent corporation can elect to treat the subsidiary as a Qualified Subchapter
S Subsidiary (QSub), in which case all assets, liabilities, income, deductions, etc. of the QSub are
treated as belonging to the parent S corporation.
d. No. Transfer of stock to the charity will not terminate the S election because charities
as described in the text chapter are permissible shareholders.
e. No. Earning tax-exempt income will not terminate the S election. pp. C:11-9
through C:11-13.
C:11-7 An inadvertent termination is one where the IRS, corporation, and shareholders all agree was
unintentional (e.g., failing the passive investment income test for three consecutive years as a result
of improperly computing the corporation’s Subchapter C E&P). Once such a determination is made,
the S corporation or its shareholders must take the necessary steps, within a reasonable time period
after discovering the event causing the termination, to restore its small business corporation status
(e.g., distributing the money or property needed to eliminate the E&P balance in the preceding
situation). By having the termination classified as inadvertent, the income passes through to the
S corporation’s shareholders and is not taxed to the corporation under the C corporation rules.
The IRS also can grant relief for inadvertent terminations of a QSub election. pp. C:11-11 through
C:11-13.
C:11-2
C:11-8 Five years. An S corporation that revokes or terminates its S election must wait five tax
years before making a new election. This delay applies unless the IRS consents to an earlier
reelection. Regulation Sec. 1.1362-5(a) indicates that permission for an early reelection can occur
when (1) more than 50% of the corporation’s stock is owned by persons who did not own stock on
the date of the termination or (2) the termination was caused by events not reasonably within the
control of the corporation or the shareholders owning a substantial interest in the corporation and
was not part of a plan to terminate the election involving the corporation or its shareholders.
p. C:11-12.
C:11-9 An S corporation generally must adopt a permitted tax year (which normally is a calendar
year or a 52-53 week year) as its tax year. Alternatively, it can adopt a fiscal year for which it has
established the necessary business purpose (e.g., natural business year). If the corporation uses the
business purpose exception as authority to adopt a fiscal year, IRS approval of the tax year is
required. As another alternative, the S corporation can elect under Sec. 444 to adopt or change to a
tax year with a limited deferral period (e.g., three months or shorter period), if the adoption or
change does not result in a greater deferral period than does the year presently being used. The
adoption of a fiscal year with a limited deferral period is permitted in the corporation’s initial tax
year or after the S corporation has been in business for one or more years. Other acceptable tax
years include an ownership year, a “grandfathered” fiscal year, or a tax year based on a business
purpose other than a natural business year (e.g., facts and circumstances year). pp. C:11-13 and
C:11-14.
C:11-10 To maintain a fiscal year under a Sec. 444 election, Cable must choose a year-end of
September 30, October 31, or November 30 so the deferral period is three months or less. The
corporation also must make the required payments mandated under Sec. 7519 and file a Form 8752
annually. pp. C:11-13 and C:11-14.
C:11-11 Subchapter C earnings and profits (E&P) are profits earned in a tax year for which an
S election was not in effect (e.g., a tax year preceding an S election during which the corporation
was a C corporation) or E&P that the S corporation inherited from a C corporation under the tax
attribute carryover rules of Sec. 381 (see Chapter C:7). The existence of Subchapter C E&P at the
close of a tax year prevents the corporation from earning an unlimited amount of passive investment
income and being exempt from the excess net passive income tax for the year in question. An
S corporation having Subchapter C E&P at the end of its tax year is subject to the excess net passive
income tax if its passive investment income for the tax year exceeds 25% of its gross receipts.
Failing the 25% test for three consecutive tax years while having Subchapter C E&P at the end of
each tax year results in termination of the S election at the beginning of the fourth year in addition to
imposition of the tax for each of the three years. pp. C:11-10 and C:11-16.

C:11-3
C:11-12 The S corporation’s ordinary income or loss and each separately stated item are allocated to
each shareholder as follows:
a. Allocate an equal portion of the item to each day in the tax year (by dividing the
amount of the item by the number of days in the S corporation’s tax year).
b. Allocate an equal portion of the daily amount for the item to each share of stock
outstanding on each day (by dividing the daily amount for the time period by the number of shares of
stock outstanding on a particular day).
c. Total the daily allocations for each outstanding share of stock.
d. Total the amounts allocated to each share of stock held by the shareholder.
The S corporation rules do not permit special allocations of income, gain, loss, or deduction
items (like those available to a partnership). Special rules apply if the S election terminates in the tax
year or if a shareholder sells or otherwise disposes of his or her entire S corporation stock interest.
pp. C:11-19 through C:11-21.
C:11-13 Stock and debt basis limitations on losses. Each shareholder’s deduction for his or her
share of the ordinary loss and the separately stated loss and deduction items is limited to the sum of
the adjusted basis for his or her S corporation stock plus the adjusted basis of any indebtedness owed
directly by the S corporation to the shareholder. Excess loss and deduction items carry over to
subsequent years in which the shareholder again has a positive basis amount. In determining stock
basis for the loss limitation, the shareholder first makes positive basis adjustments for any separately
stated income or gain items and makes a negative basis adjustment for any distribution. Debt basis
for the loss limitation is the balance before any adjustments. Unused losses lapse if the shareholder
transfers his or her stock to anyone other than a spouse or former spouse incident to a divorce. In
addition to basis loss limitation, the shareholder’s loss or deduction allocation may be subject to the
at-risk rules, the passive activity limitation rules, the limitation on excess business losses, the
investment interest deduction rules, the hobby loss rules, or the regular shareholder deduction
limitations (e.g., the shareholder’s charitable contribution deduction limitation). These other
limitations may prove more restrictive than the general basis limitation.
pp. C:11-21 through C:11-24.
C:11-14 Increase stock or debt basis. The shareholder can make additional capital contributions or
make additional loans to the corporation by year-end. This basis increasing strategy permits the loss
deduction to be larger in the current year provided the special loss limitations such as the at-risk
rules, passive activity limitation rules, or the limitation on excess business losses do not restrict the
deduction available under the shareholder’s basis limitation. Depending on the shareholder’s
marginal tax rates for the current year and next year, the shareholder should consider deferring the
additional capital contributions or loans until after year-end when he or she expects the marginal tax
rate to be higher in the next tax year to obtain a larger tax savings. pp. C:11-36 and C:11-37.
C:11-15 A post-termination transition period generally is a one-year period immediately following

the last day of the final S corporation tax year in which loss and deduction carryovers can be used by
the S corporation’s shareholders even though the S election has been revoked or terminated. In some
cases, the post-termination transition period may run to the due date for the S corporation tax return
(including extensions). A post-termination transition period also includes the 120-day period
beginning on a determination date (e.g., date on which a court decision becomes final) or a closing

C:11-4
agreement is finalized. The loss and deduction carryovers can be deducted only up to the adjusted
basis of the shareholder’s stock at the end of the post-termination transition period. Loss and
deduction carryovers cannot be deducted against the basis for amounts owed by the corporation to a
shareholder. To prevent losses from not being deductible, the shareholder should consider making
capital contributions before the end of the post-termination transition period.
pp. C:11-23 and C:11-24.
C:11-16 Shareholders make positive adjustments to the basis of their S corporation stock annually for
additional capital contributions made during the tax year and their allocable share of ordinary income
and separately stated income and gain items. They make negative adjustments to the basis of their
S corporation stock annually for (1) distributions excluded from the shareholder’s gross income,
(2) expense items not deductible in determining ordinary income (loss) and that cannot be charged to
the capital account, and (3) the shareholder’s allocable share of ordinary loss and separately stated loss
and deduction items. Special stock basis adjustment rules apply to S corporations that claim a
deduction for percentage depletion with respect to oil and gas wells. The same positive and negative
income and loss basis adjustments apply to the basis of any S corporation debt owed to the shareholder
except that distributions do not reduce debt basis. However, the downward loss and deduction
adjustments reduce the shareholder’s debt basis only after the shareholder’s basis for the S corporation
stock has been reduced to zero. Any net positive basis adjustments restore the basis of S corporation
debt owed to the shareholder before any positive basis adjustments increase the shareholder’s basis for
the S corporation stock. pp. C:11-25 through C:11-28.
C:11-17 An S corporation recognizes gain (but not loss) under Sec. 311(b) when it makes a
nonliquidating property distribution to its shareholders. A partnership recognizes no gain or loss when
it makes a nonliquidating property distribution except to the extent that (1) the Sec. 751 rules may
apply to certain disproportionate distributions or (2) the precontribution gain rules of Sec. 737 apply to
the distribution. S corporations having no E&P will make nontaxable distributions if the total amount
of the distribution does not exceed the shareholder’s basis for his or her stock. This procedure
generally follows the rules for partnership distributions except to the extent the S corporation
recognizes gain when distributing appreciated property, in which case the shareholder increases stock
basis by his or her share of the gain and reduces his or her stock basis by the property’s FMV. Some S
corporations must maintain records of their accumulated adjustments account (AAA) and Subchapter
C E&P. Similar concepts are not found in partnership taxation. For S corporations having an E&P
balance, distributions follow a complex set of rules and are sourced in part or in full from the AAA or
Subchapter C E&P. pp. C:11-28 through C:11-32 (also see Chapter C:10).
C:11-18 Nonliquidating distributions paid by an S corporation that has no accumulated E&P are
treated as a return of the shareholder’s basis for his or her stock investment. As such, all
distributions paid to the shareholder up to the amount of his or her stock basis are nontaxable.
Distributions exceeding the shareholder’s stock basis are taxable as capital gains.
Different rules apply to S corporations that have accumulated E&P. Distributions out of the
accumulated adjustments account (AAA) are nontaxable and reduce (but not below zero) the
shareholder’s stock basis. Distributions out of the S corporation’s accumulated E&P are taxable as
dividend income. Distributions exceeding the S corporation’s accumulated E&P also are nontaxable
and reduce the shareholder’s stock basis. Distributions exceeding the shareholder’s stock basis are
taxable as capital gains. pp. C:11-28 through C:11-32.
C:11-5
C:11-19 The accumulated adjustments account (AAA) is the cumulative total of ordinary income or
loss and separately stated items for the S period. The AAA is required only of S corporations that
have an accumulated E&P balance. The S period is the most recent continuous period during which
the corporation has been an S corporation. Tax years beginning before January 1, 1983 are not
included in this period. Tax-exempt income and nondeductible expenses related to the production of
the tax-exempt income do not increase or decrease the AAA but instead are included in the other
adjustments account (OAA), which is not a separate earnings balance but is included in the basis of
the S corporation stock. All other income, gain, loss, and deduction items increase and decrease
AAA and the shareholder’s stock basis. Even if the corporation has no accumulated E&P at
year-end, the IRS recommends reporting a AAA according to the instructions for Form 1120S.
pp. C:11-29 through C:11-32.
C:11-20 a. S corporation shareholders report ordinary income or loss (as well as separately stated
items) on their individual returns and may be eligible for the qualified business income deduction. A C
corporation reports ordinary income or loss in its taxable income.
b. Dividends pass through the S corporation as a separately stated item, and the
S corporation shareholders report the dividends in their individual returns, subject to the applicable
capital gains tax rate. A C corporation includes dividends received in its gross income and then
takes a 50%, 65%, or 100% dividends-received deduction.
c. Capital gains and losses pass through the S corporation as separately stated items, and
the S corporation shareholders report them on their individual returns along with their other capital
gains and losses. Capital gains and losses recognized by a C corporation are reported in the
corporation’s taxable income.
d. Tax-exempt interest income passes through to the S corporation’s shareholders as a
separately stated item. It is not taxed either to the S corporation’s shareholders or to the
S corporation. C corporations are not taxed on their tax-exempt income; however, such amounts are
included in the C Corporation’s E&P and are taxable to its shareholders when distributed.
e. Charitable contributions pass through the S corporation as a separately stated item,
and the S corporation shareholders report them on their tax returns along with their other charitable
contributions. The charitable contribution deduction limitation applies at the shareholder level.
A C corporation deducts charitable contributions, which are limited to 10% of its adjusted taxable
income.
f. Nonliquidating property distributions made by an S corporation without accumulated
E&P are treated as a nontaxable return of capital and reduce the shareholder’s basis for his or her
S corporation stock. Distributions that exceed the stock basis are taxed as capital gains. Different
rules apply to S corporations that have accumulated E&P. Any such distributions these corporations
make out of accumulated E&P are taxable as a dividend. Distributions made out of the accumulated
adjustments account (AAA) are nontaxable until the shareholder’s stock basis has been reduced to
zero. Nonliquidating distributions made by a C corporation are taxable as a dividend if paid out of
current or accumulated E&P. Distributions exceeding E&P reduce the shareholder’s basis for his or
her stock. Distributions exceeding the shareholder’s basis are taxed as capital gains. Both C and S
corporations recognize gain on the distribution of appreciated property. C corporations pay tax on
that gain while S corporations pass the gain to its shareholders.
g. Fringe benefits paid to or on behalf of an owner-employee owning more than 2% of
the S corporation’s stock are treated as if the corporation were a partnership. As such, the
owner-employee is not an employee, and the fringe benefit is treated as compensation taxable to the
C:11-6
shareholder-employee unless the benefit is excludible from the gross income of a partner. The
corporation deducts compensation. Fringe benefits paid to or on behalf of an owner-employee of a C
corporation, or to an S corporation shareholder-employee owning less than 2% of the stock, are
excluded by the individual and deductible by the corporation. pp. C:11-14, C:11-15, C:11-28 through
C:11-35.
C:11-21 The S corporation’s tax return is due on the fifteenth day of the third month following the
close of the tax year. The corporation can request, via Form 7004, an automatic six-month extension
of time to file the return. p. C:11-39.
C:11-22 S corporations must make estimated tax payments for the two special corporate level
taxes--the excess net passive income tax and the built-in gains tax. The estimated tax minimums for
an S corporation differ from those of a C corporation. Both require 100% of the tax shown on the
return for the current year. The prior year tax rule for S corporations is 100% of the built-in gains
tax for the current year and 100% of the excess net passive income tax for the preceding year
(instead of the 100% of prior year tax liability rule applicable to C corporations). Any tax payments
made by the S corporation do not reduce the shareholder’s required estimated tax payments, but the
estimated payments reduce the ordinary income and separately stated items passed through to the
shareholders. pp. C11-39 and C:11-40.
C:11-23 Some of the similarities and differences are listed below; however, this list should not be
considered all inclusive:
Similarities among all three returns:

1. Cost of goods sold is calculated the same.
2. A balance sheet is presented for all business forms.
3. Schedule M-1 or Schedule M-3 on Forms 1120, 1120S, and 1065 reconciles book
income with income reported on the return. For the S corporation return, this reconciliation is to the
ordinary income (loss) amount plus separately stated income and deduction items. Schedule M-2 on
the Form 1120 reconciles accumulated book income (retained earnings), and Form 1120S reconciles
three accumulated earnings account balances while the Form 1065 reconciles the capital account
balance.
Differences:
1. Form 1120 taxable income includes all income earned by the corporation during the
tax year, but Forms 1065 and 1120S ordinary income excludes separately stated items.
2. Forms 1065 and 1120S have Schedules K and K-1 to report pass-through items in
total and to each of the owners while Form 1120 does not.
3. Forms 1065 and 1120S require specific information on rental real estate activities
while Form 1120 does not.
4. Controlling ownership information is given on all three forms; however, Forms 1065
and 1120S list all ownership interests on the Schedule K-1s for the owners.
5. Form 1065 does not include any tax calculations or estimated tax payments. Forms
1120 and 1120S require tax calculations and possibly estimated tax payments.
6. All three forms request different additional information.

C:11-7
7. Form 1120 includes the dividends-received deduction while Forms 1065 and 1120S
do not.
8. Form 1120 requests information on officer’s compensation while Forms 1065 and
1120S do not.
Issue Identification Questions
C:11-24 • Does the incorporation transaction qualify as nontaxable under Sec. 351?
• Are advantages to be gained by transferring the partnership’s assets to the corporation
in exchange for its stock and then liquidating the partnership?
• Alternatively, are advantages to be gained by first liquidating the partnership and
then transferring the assets to the corporation in exchange for its stock?
• What is the amount and character of the gain or loss recognized on the incorporation
by the partnership? The corporation? The partners?
• What is the corporation’s basis in the assets?
• What is each shareholder’s basis in the corporation stock?
• When does the holding period start for the assets? The corporation’s stock?
• What tax year should the corporation elect? Does this tax year have to be the same
tax year used by the partnership?
• What accounting methods should the corporation elect? Do these accounting
methods have to be the same accounting methods used by the partnership?
• What procedures must the corporation and shareholders follow to make an
S election?
• By what date must the corporation make the election?
• What format does the election take?
• What consents are required of the shareholders?
One underlying question that might be brought up is: Should the tax practitioner and the
transferor consider converting the partnership to an LLC instead of an S corporation?
The entity making the S election does not have to be a corporation. A noncorporate entity
can make an S election and is deemed to automatically make the election to be treated as a
corporation under Reg. Sec. 301.7701-3(h)(3). If the partnership formally incorporates, however, the
method of incorporation does matter. The tax consequences (gain recognized, basis amounts, etc.)
can differ depending on which of the three basic methods are used to terminate the partnership and
transfer the assets to the corporation. The three methods, described in Rev. Rul. 84-111, 1984-2
C.B. 885, are: (1) the partnership transfers assets to the corporation in exchange for stock, and the
partnership transfers the stock to its partners in liquidation; (2) the partnership transfers assets to its
partners in liquidation, and the former partners transfer the assets to the corporation in exchange for
stock; and (3) the partners transfer their partnership interests to the corporation in exchange for
stock, and the partnership transfers the assets to the corporation in liquidation. Without further
information, the gain and basis amounts cannot be determined, nor can we say which of the three
ways is better. The S corporation can use a tax year different than the partnership, but it does have
to be a required year. Likewise, the S corporation can elect any accounting method that it chooses
without regard to the method employed by the partnership. The corporation must file an S election
(Form 2553) in a timely manner, and the shareholders must provide the appropriate consents.
C:11-8
A conversion from a partnership to an LLC is covered by rules different than for a corporate
formation (see Chapter C:10). pp. C:11-2 through C:11-9, C:11-13, C:11-14, and C:11-38 (also see
Chapter C:2).
C:11-25 The questions listed below are based on the presumption that an S election will be
advantageous and that the S corporation is the best entity choice for the corporation.
• What procedures must the corporation and shareholders follow to make an S election?
• By what date must the corporation make the election?
• What format does the election take?
• What consents are required of the shareholders?
• What tax year should the S corporation elect? Does this tax year have to be the same
tax year used by the C corporation?
• What accounting methods should the S corporation elect? Do these accounting
methods have to be the same accounting methods used by the C corporation?
• What possible built-in gains tax liability will the S corporation incur?
• Should the corporation obtain an appraisal of the assets as of the first day of the
S election?
• What tax attributes (e.g., NOLs and capital losses) will be suspended as a result of
making the S election?
• What possible excess net passive income tax liability will the S corporation incur?
• Should the corporation consider distributing its Subchapter C E&P to eliminate this
tax liability?
• What possible LIFO recapture tax liability will the corporation incur in its final
C corporation tax year?
The corporation must file an S election (Form 2553) in a timely manner, and the
shareholders must provide the appropriate consents. The S corporation cannot automatically use a
tax year different than that used by the C corporation, but it may have to change to a required tax
year, usually a calendar year. The S corporation must continue to use the accounting methods the
C corporation used.
Section 1374 imposes built-in gains tax liability on asset dispositions occurring within ten
years of the first day of the S election period (unless the shortened seven-year or five-year recognition
period applies). The parties should consider obtaining an appraisal to establish the amount of the built-
in gains and losses to minimize the built-in gains tax liability. C corporation NOLs and net capital
losses can reduce the built-in gains tax liability but cannot pass through to the shareholders. In
addition, if the S corporation has Subchapter C E&P, it may incur the excess net passive income tax
liability if it earns a substantial amount of passive income. Also, the S corporation may incur the LIFO
recapture tax if it used the LIFO inventory method in its final C corporation tax year.
pp. C:11-7 through C:11-9, C:11-13 through C:11-18, and C:11-38.

C:11-9
C:11-26 • What is Peter’s allocable share of the Air South ordinary loss?
• What portion of the loss is limited by the S corporation stock basis and debt basis?
The at-risk rules? The passive activity loss rules? The limitation on excess business
losses?
• If his use of the loss is limited only by the S corporation stock basis and debt basis,
should Peter invest additional amounts before year-end to increase the basis of the
stock and/or debt? When should such an investment be made? Before year-end?
After year-end? Should he not make an additional investment and use the loss
against future profits?
Peter should anticipate a $187,500 ordinary loss pass-through, which exceeds his $100,000
basis for the Air South stock. He should make the additional investment only if it is economically
wise. Even if Peter makes the additional investment, he still might not be able to deduct the loss.
The passive activity loss rules may deny the loss until Peter has passive income from this or another
activity or until he completely disposes of his investment. His share of losses will be too small to be
subject to the limitation on excess business losses. The tax year to make the additional investment,
and deduct the loss, will be the year in which Peter anticipates the highest marginal tax rate
(discounted for the time value of money.) pp. C:11-19 through C:11-23, C:11-36, and C:11-37.
C:11-27 • What gain or loss does Glacier Smokeries recognize on making the distribution?
Will the shareholders have to recognize this gain or loss? Does the gain or loss
trigger any built-in gains tax liability?
• What is each shareholder’s basis for the Glacier Smokeries’ stock immediately
preceding the distribution?
• What basis reduction does the distribution cause for each shareholder? Does the
basis reduction trigger the recognition of any income by the shareholder (e.g., if the
distribution reduces the shareholder’s basis to zero).
• What is each shareholder’s basis for the Glacier Smokeries stock immediately
following the distribution?
• What is each shareholder’s basis and holding period for the land received?
Glacier Smokeries will recognize a $225,000 ($300,000 - $75,000) gain on the distribution.
This gain is not subject to the Sec. 1374 built-in gain tax because Glacier was never a C corporation.
This gain and Glacier Smokeries’ ordinary income from operations will pass through to the
shareholders and increase their stock bases. Adam and Rodney take $350,000 ($175,000 + $112,500
+ $62,500) and $400,000 ($225,000 + $112,500 + $62,500) bases, respectively. Each shareholder
reduces his stock basis by $150,000 ($300,000 x 0.50) for the distribution. pp. C:11-16 through
C:11-18, and C:11-28 through C:11-32.

C:11-10
Problems
C:11-28 a. $31,500 total tax if no distribution or salary payment made, calculated as follows:
Delta:
Income tax ($150,000 x 0.21) $31,500
Social Security tax -0-
Carl:
Income tax -0-
Total tax $31,500
b. $35,910 total tax if dividend of $80,000 paid, calculated as follows:
Delta:
Income tax ($150,000 x 0.21) $31,500
Carl:
Income tax [($38,600 x 0.0) + $29,400 x 0.15)]* 4,410
Total tax $35,910
*Carl’s taxable income is $68,000 ($80,000 dividend - $12,000 standard deduction), which
is subject to the 0% and 15% tax rates on qualified dividends.
c. $36,555 total tax if salary of $80,000 paid, calculated as follows:
Delta:
Income tax ($63,800 x 0.21)a $13,415
Social Security tax 6,120
Carl:
Income tax [$4,453.50 + 0.22 x ($68,000 - $38,700)]b 10,900
Total tax $36,555
a
Delta’s taxable income is $63,880 ($150,000 - $80,000 salary deduction - $6,120 Social
Security tax deduction).
b
Carl’s taxable income is $68,000 ($80,000 salary - $12,000 standard deduction), which
is subject to ordinary tax rates.
Conclusion: To get $80,000 from the C corporation to Carl, the dividend alternative entails
the lowest total tax liability because of the low corporate tax rate and the large portion of the
dividend that is taxed at a 0% tax rate. The difference between the dividend and salary alternatives,
however, is not large because the salary alternative avoids double taxation on the $80,000 amount
deducted as salary.
d. Parts a – d variation with Delta being an S corporation.

C:11-11
a. $20,786 total tax if no distribution or salary payment made, calculated as follows:
Delta:
Income tax $ -0-
Carl:
Income tax [$14,089.50 + 0.24 x ($110,400 - $82,500)]* 20,786
Total tax $20,786
*Carl’s taxable income is $110,400 ($150,000 pass-through income - $12,000 standard
deduction - $27,600 QBI deduction), which is subject to ordinary tax rates.
Combined QBI = $30,000 ($150,000 x 0.20).
20% of excess taxable income = $27,600 [($150,000 - $12,000) x 0.20].
Thus, QBI deduction = $27,600.
b. $20,786 total tax if distribution of $80,000 made:
Same as Part a (of Part d variation). Carl’s pass-through income from Delta is $150,000
whether or not Delta distributes any of it. Also, the QBI deduction remains the same.
c. $35,114 total tax if salary of $80,000 paid, calculated as follows:
Delta:
Income taxa $ -0-
Carl:
Income tax [$14,089.50 + 0.24 x ($119,104 -$82,500)]b 22,874
Total tax $35,114
a
Delta’s ordinary income is $63,880 ($150,000 - $80,000 salary deduction - $6,120
Social Security tax deduction), which passes through to Carl.
b
Carl’s taxable income is $119,104 ($80,000 salary + $63,880 pass-through income -
$12,000 standard deduction - $12,776 QBI deduction), which is subject to ordinary tax rates.
Combined QBI = $12,776 ($63,880 x 0.20).
20% of excess taxable income = $26,376 [($80,000 + $63,880 - $12,000) x 0.20].
Thus, QBI deduction = $12,776.
Conclusion: To get $80,000 from the S corporation to Carl, the distribution alternative
entails the lowest total tax liability because it avoids the Social Security taxes on a salary payment,
and it increases the QBI deduction. Because of this tax savings opportunity, the IRS might challenge
the level of salary ($0) as unreasonably low. pp. C:9-17 through C:9-19, C:11-20, and C:11-21.
C:11-29 a. Voyles Corporation makes the S election by filing Form 2553 in a timely manner
with all its shareholders consenting to the election.
b. The corporation can make the S election (1) any time during the tax year preceding
the year for which the election is to be effective (2018) or (2) on or before the fifteenth day of the
third month of the year for which the election is effective (March 15, 2019). Corporations making an
C:11-12
S election in their initial tax year must make the election not later than the fifteenth day of the third
month of the initial tax year.
c. The election will take effect on the first day of the next tax year (2019) unless the
corporation obtains relief from the IRS for its late election. pp. C:11-8 and C:11-9.
C:11-30 a. The sale of the second class of stock terminates the S election at the close of business
on September 11, 2018.
b. Two tax returns are required covering the following time periods: (1) an S corporation
return for January 1, 2018 through September 11, 2018; and (2) a C corporation return for September
12, 2018 through December 31, 2018. According to Sec. 1362(e)(6)(B), the S return is due on
March 15, 2019, and the C return is due on April 15, 2019.
c. The IRS does not recognize the Class B common stock as a second class of stock, and
the S corporation election does not terminate if the only difference between the original common
stock and the Class B common stock is the voting rights. pp. C:11-5 through C:11-7, C:11-9, and
C:11-10.
C:11-31 a. Tango Corporation must file a revocation statement on or after June 16, 2018, to
which the sole shareholder consents. If Tango files the revocation before the end of 2018, it can
designate a prospective revocation date in 2018 or a later year. If Tango files the revocation on or
before March 15, 2019, the revocation takes effect at the beginning of 2019; otherwise, it must be
made on a prospective basis.
b. The corporation files an S corporation return for the period January 1, 2018 through
June 30, 2018. The corporation files C corporation returns for the period July 1, 2018 through
December 31, 2018 and January 1, 2019 through December 31, 2019. The 2018 S return is due on
March 15, 2019, and the 2018 C return is due on April 15, 2019. The 2019 C return is due on April
15, 2020.
c. The S corporation must wait five tax years before making a new election unless the
IRS consents to an earlier reelection. The new election takes effect on January 1 of the fifth year
beginning after the revocation year. pp. C:11-9 through C:11-12.
C:11-32 The sale will terminate the S corporation election because the partnership is an ineligible
shareholder. Under the general S corporation rules, the termination will be effective on
December 31 of the current year. Galleon Corporation files an S corporation return for the period
January 1 through December 31 of the current year. For next year and later tax years, Peter and
Alice must include the Galleon distributions in their gross income as dividend income, provided
Galleon has E&P. No other income or loss pass-throughs will occur while Galleon operates as a
C corporation. Peter and Alice can reelect S corporation status after a five-year waiting period.
To avoid the termination, Galleon could claim relief under the inadvertent termination rules if
the shareholders take immediate steps to eliminate the cause of the termination. To correct the
inadvertent termination, Rob and Susan should liquidate their partnership and distribute the Galleon
stock to themselves, again holding it as individuals. Therefore, the ineligible shareholder would be
eliminated. Alternatively, the partnership could sell the stock back to Peter and Alice. Also, the parties
must obtain the IRS’s approval to waive the inadvertent termination. pp. C:11-9 through C:11-13.
C:11-33 a. No. The maximum deferral the corporation can elect is three months unless a
business purpose exists for the fiscal year ending January 31. Classic Corporation can adopt a
C:11-13
September 30 year-end if it makes a timely Sec. 444 election and makes the required payments under
Sec. 7519. The September 30 year-end will permit a three-month income deferral.
b. Yes. The June 30 year-end conforms to its natural business year; therefore, it satisfies
the business purpose requirement. IRS approval of the natural business year is required, as is
conformity to the income requirement for the last two months of the natural business year. pp. C:11-
13 and C:11-14.
C:11-34 a. Yes; $18,342 tax. North Corporation is subject to the excess net passive income tax
because (1) it has passive investment income ($160,000) that exceeds 25% of its gross receipts (0.25
x $210,000 = $52,500) and (2) it has Subchapter C E&P at the close of the current year. The
services income is not passive investment income because it is derived from the active conduct of a
trade or business. North’s tax liability is determined as follows:
Excess net Net

passive = passive x $160,000 - (0.25 x $210,000)
income income $160,000
($87,344) ($130,000)a
a
($100,000 + $60,000) - $30,000 direct expenses = $130,000
Tax = 0.21 x $87,344 = $18,342
The S corporation pays the Sec. 1375 tax in the form of estimated tax payments made during the tax
year.
b. The excess net passive income tax reduces, on a pro rata basis, the amount of ordinary
income and separately stated items (dividends and rents in this case) that were subject to tax and
passed through to the shareholders. The reduction is as follows:
$60,000
Dividends: $18,342 x = $6,878
$60,000 + $100,000
$100,000
Rents: $18,342 x = $11,464
$60,000 + $100,000
The dividend pass-through is $53,122 ($60,000 - $6,878). The rental income pass-through is
$58,536 ($100,000 - $30,000 - $11,464).
c. Tax planning alternatives available to North include: (1) earning more active income
(e.g., services income); (2) earning less passive income (e.g., dividend or rental income);
(3) distributing the $60,000 of Subchapter C E&P to its shareholders; or (4) distributing the stocks
and/or rental property to the shareholders. If the passive income situation persists for three years, the
S election will terminate. pp. C:11-15, C:11-16, C:11-37, and C:11-38.

C:11-14
C:11-35 $20,160 built-in gains tax, determined as follows:
Receivables $200,000
Automobile (Sec. 1245 gain) 1,000a
Land (Sec. 1231 gain) 20,000b
Accounts payables (125,000)c
Recognized built-in gains $ 96,000
Limited to smaller of: Current year taxable income $400,000
Net unrealized built-in gain 295,000d
Recognized built-in gains 96,000
a
$2,300 [$3,500 - ($2,000 - $800)] recognized gain. Limited to $1,000 built-in gain on first day of
first S corporation tax year (last year).
b
$35,000 ($60,000 - $25,000) recognized gain. Limited to $20,000 built-in gain on first day of
first S corporation tax year (last year).
c
Deductible accounts payable only.
d
$420,000 ($600,000 - $180,000) unrealized built-in gains - $125,000 unrealized built-in losses =
$295,000 net unrealized built-in gain.
Neither special limitation (taxable income nor net unrealized built-in gain) applies because the total
recognized built-in gains are less than either limitation.
The built-in gains tax liability equals $20,160 ($96,000 x 0.21). The built-in gains tax
liability reduces the income pass-through for the receivables, the automobile gain (ordinary income),
and the land gain (Sec. 1231 gain) on a ratable basis. pp. C:11-16 through C:11-18.
C:11-36 a. S corporation ordinary income:

Sales $300,000
Minus: Cost of goods sold ( 140,000)
Gross profit $160,000
Plus: Sec. 1245 gain 22,000
Minus: Depreciation $18,000
Salary to Nancy 20,000
Business interest 32,000
Business meals ($2,200 x 0.50) 1,100 ( 71,100)
S corporation ordinary income $110,900
Separately stated items:
Dividend income $ 10,000
Sec. 1231 gain 12,000
Net long-term capital gain ($8,000 - $7,000) 1,000
Tax-exempt interest income 3,000
Short-term capital loss (6,000)
Investment interest expense (6,400)
Charitable contributions (2,000)
Nondeductible business meals (1,100)
Nondeductible interest on tax-exempt interest income (1,800)

C:11-15
b. Mike and Nancy each would report one-half of S corporation ordinary income and
one-half of each separately stated item.
c. Stock basis adjustments:

Mike Nancy
Beginning basis $100,000 $100,000

Plus: S corporation ordinary income 55,450 55,450
Dividend income 5,000 5,000
Sec. 1231 gain 6,000 6,000
NLTCG ($8,000 - $7,000) 500 500
Tax-exempt interest income 1,500 1,500
Minus: Distributions (15,000) (15,000)
Nondeductible business meals (550) (550)
Nondeductible interest (900) (900)
NSTCL (3,000) (3,000)
Investment interest expense (3,200) (3,200)
Charitable contributions (1,000) (1,000)
Ending basis $144,800 $ 144,800
pp. C:11-14, C:11-15, C:11-15, and C:11-26.
162*
C:11-37 John: $125,000 x 100% x = $ 55,479
365
203 62,569
$125,000 x 90% x =
365 $118,048
*The donor is assigned the income for the gift date. See Reg. Sec.
1.1377 – 1(a)(2)(ii).
Michael: $125,000 x 10% x 203 = $ 6,952

365
pp. C:11-19 through C:11-21, C:11-35, and C:11-36.

C:11-16
C:11-38 On a daily basis, the pass-through income would be allocated as follows:
Al: OI: $180,000 x 50% = $ 90,000
Sec. 1231: $ 75,000 x 50% = 37,500

$127,500
95 = $ 23,425a
Ruth: OI: $180,000 x 50% x
365
Sec. 1231: $ 75,000 x 50% x 95 = 9,760

365 $ 33,185
Patty: OI: $180,000 x 50% x 270 = $ 66,575

365
Sec. 1231: $ 75,000 x 50% x 270 = 27,740

365 $ 94,315
a
The seller is allocated the income for the sale date. See Reg. Sec. 1.1377-1(a)(2)(ii).
However, because Ruth terminated her interest on April 5, Chemical Corporation can elect
to allocate income according to the accounting method used by the corporation. This closing of
books election produces the following income allocation:
Al: OI: $180,000 x 50% = $ 90,000
Sec. 1231: $ 75,000 x 50% = 37,500

$127,500
Ruth: OI: $ 47,500a x 50% = $ 23,750
Patty: OI: $132,500b x 50% = $ 66,250
Sec. 1231: $ 75,000 x 50% = 37,500

$103,750
a
($15,000 x 3) + (5/30 x $15,000) = $47,500. Five days of income are allocated to Ruth in
the fourth month because the seller is allocated the income for the sale date. No Sec. 1231 gain is
allocated to Ruth because the corporation sold the asset after Ruth sold her stock investment. Only
Al and Patty receive an allocation of the Sec. 1231 gain.
b
$180,000 - $47,500 = $132,500

C:11-17
All affected shareholders in Chemical must agree to the election. Affected shareholders
include shareholders whose interests are terminated and all shareholders to whom the terminating
shareholders transferred their interest. In this case, the affected shareholders are Ruth and Patty. The
difference in the income reported by Ruth and Patty under the two alternatives should be a point for
negotiation when entering into the sales agreement. pp. C:11-20, C:11-21, C:11-35, and C:11-36.
C:11-39 a. The changes in stock ownership during the year require an allocation based on the
number of days the shareholders held the stock. The results of this allocation and the formulas used
are presented below. Note: the shareholder who disposes of his or her stock is treated as the
shareholder on the day of disposition. See Reg. Sec. 1.1377-1(a)(2)(ii).
Allocation to Shareholder Boba Aliceb Carterc Miked Total

Ordinary income $72,000 $26,926 $10,981 $10,093 $120,000
Long-term capital loss 6,000 2,244 915 841 10,000
Charitable contributions 3,600 1,346 549 505 6,000
a 60 365
x x Total Amount
100 365
b 30 181 15 184
x x Total Amount + x x Total Amount
100 365 100 365
c 10 334
x x Total Amount
100 365
d 15 184 10 31
x x Total Amount + x x Total Amount
100 365 100 365
b. Adjusted basis = $26,000 + $10,981 - $915 - $549 = $35,517

Recognized gain = $45,000 - $35,517 = $9,483
pp. C:11-19 through C:11-21, C:11-35, and C:11-36.

C:11-18
C:11-40 The sale of the additional stock terminates the S corporation election at the close of business
on June 30. The income for the first half year is allocated equally to Rod and Kurt. The income for
the last half year is taxed to Redfern Corporation under the C corporation rules.
Daily allocation: Pre-7/1a Post-6/30b

Ordinary Capital Ordinary Capital
Shareholder Income Loss Income Loss
Rod $30,993 ($3,719)
Kurt 30,993 ( 3,719)
Blackfoot Corporation -0- -0- $ -0- $ -0-
Redfern Corporation ______ ______ 63,014 ( 7,562)
Total $61,986 ($7,438) $63,014 ($7,562)
a 181
x Amount = Amount allocated to pre-July 1 period
365
b 184 x Amount = Amount allocated to post-June 30 period

365
Accounting method allocation:
Pre-July 1: Ordinary income: $125,000 x 0.20 = $25,000 allocated to S corporation
short-year; $12,500 to each Rod and Kurt.
Capital loss: $0, because the corporation sold asset in the C short year.
Post-June 30: Ordinary income: $125,000 - $25,000 (allocated to C short year) =

$100,000 taxed to Redfern Corporation in C short year.
Capital loss: $15,000 (carried over to next year by Redfern).
Some tax savings might accrue by creating a second tax paying entity (the C corporation
after the loss of its S election), having the income taxed at the lower 21% corporate tax rates, and
retaining the income within the corporation. Thus, the accounting method election might maximize
the income taxed at the corporate level in the last half of the tax year.
pp. C:11-19 through C:11-23.
C:11-41 a. The answers below assume the three sons are considered to be bona fide owners of
the S corporation stock.
Betty: $60,000 salary and $132,000 ordinary income (0.55 x $240,000)
John: $36,000 ordinary income (0.15 x $240,000)
Andrew: $36,000 ordinary income (0.15 x $240,000)
Stephen: $36,000 ordinary income (0.15 x $240,000)
Because Andrew and Stephen are younger than 18 years old, their income will be taxed at a special
rate based on the estate and trust income tax rates. John is 24; therefore, he will be taxed under the
regular progressive rate structure. The distributions do not trigger any additional tax liability.
C:11-19
b. Betty: $120,000 salary and $99,000 ordinary income (0.55 x $180,000)
John: $27,000 ordinary income (0.15 x $180,000)
Andrew: $27,000 ordinary income (0.15 x $180,000)
Stephen: $27,000 ordinary income (0.15 x $180,000)
c. Betty: $60,000 salary and $240,000 ordinary income.
p. C:11-25.
C:11-42 a.
Monte Allie
Allocation to shareholders:
Ordinary loss $87,500 $ 87,500
Tax-exempt interest income 10,000 10,000
Long-term capital loss 16,000 16,000
Loss limitation:
Beginning stock basis $80,000 $ 90,000
Plus: Tax-exempt interest 10,000 10,000
Stock basis before losses $90,000 $100,000
Plus: Debt basis -0- 10,000
Loss limitation $90,000 $110,000
Loss deduction:
Ordinary loss $76,087a $ 87,500c
Capital loss $13,913b $ 16,000c
a
[$87,500/($87,500 + $16,000)] x $90,000 = $76,087
b
[$16,000/($87,500 + $16,000)] x $90,000 = $13,913
c
No limitation applies because the total loss of $103,500 ($87,500 + $16,000) is less than the
Allie’s $110,000 limitation.
b. Monte’s stock: $90,000 - $90,000 = $0
c. Allie’s stock: $100,000 - $100,000 = $0
Allie’s note: $10,000 - $3,500 = $6,500
d. Monte has an $11,413 ($87,500 - $76,087) ordinary loss carryover and a $2,087
($16,000 - $13,913) capital loss carryover to the next year. Allie has no loss carryovers.

C:11-20
Another random document with
no related content on Scribd:
Mexican was more than his match. Boylike he preferred direct
action.
“Sorry that I can’t see it that way, señor,” he replied shortly, gulping
down his indignation. “I should be glad to furnish you with a copy of
this tablet for your archives, if you wish,” he conceded, “but that
original plaque is mine.”
He held out his hand for it with a gesture that told he was not to be
trifled with further. Vasquez looked around desperately. Give him a
moment more and he would think up some smooth reply that would
at least gain time, perhaps argue the thing out of their very hands!
But Sid made a determined lunge for him as the Mexican backed
away.
At once the man raised his voice in a hoarse scream, “Ladrones!
Gringoes!” he yelled, fending off Sid with a push of his hand while he
turned the side with the plaque under his arm away from them. Then
he ran for a door at the back of the school. Shrill yells and the shouts
of Apache came in answer to his call from outside. There was not a
second further to lose! Scotty sprang for the man, lunging low in the
football tackle for his legs, while Sid with a fierce and accurate grip of
his strong hands tore the plaque away from under his arm, the
scuffle sending the three rolling together in a heap on the dirt floor of
the church.
“Quick! Make for that rear door!” barked Sid as he and Scotty leaped
to their feet. Vasquez squirmed on the dirt floor of the schoolhouse,
cursing horribly in Spanish and rocking to and fro as he hugged a
sprained ankle. If looks could kill, the malignant fire that darted from
his snaky eyes would have paralyzed them both! Sid raced for the
rear door while Scotty stood guard over the man with threatening
fists. The patter of running feet sounded outside the ’dobe walls.
Then a leggined Apache, with long, matted black hair, stood blinking
in at them in the blazing square of sunlight that was the front door.
Sid had reached the back door. He looked in, then beckoned Scotty
to join him. The boy raced over and, once inside the room, both boys
slammed the stout panels behind them and let drop a heavy oak
beam.
“There’s a small window, with a mesquite bush growing out in front of
it, Scotty—give me a stirrup hold!” gasped Sid, who was breathing
heavily from their tussle.
He stepped up in Scotty’s clasped hands and peered out the
window, with one arm crooked over the edge. A mesquite grew just
outside, and it was so heavily laden with dense clumps of mistletoe
as to be in a dying state. Sid figured they might climb out into it and
remain there undiscovered among the mistletoe clumps for a few
moments. Outside he saw three or four Apache bucks running
toward the schoolhouse from the grass huts perched upon the
hillside. All over the village he heard an indescribable commotion of
children and squealing squaws, but the Indians had no idea of what
really was the matter. So far only Vasquez’s screech for help had
come to their ears.
Sid climbed out through the window and then reached down his
arms to help Scotty up to its sill. An uproar and a drumming of fists
and impotent squalls in Spanish was sounding outside the oak door
of the room as they both climbed out and gained the shelter of the
mesquite. As the last buck outside ran into the school, Sid dropped
to the ground and the boys raced for their horses. An outcry of Indian
children greeted the appearance of the two fugitives, but none
offered to interfere; only one little shaver had the presence of mind to
run shrieking to the school door while Sid and Scotty were swinging
up into their saddles.
“Now ride, Scotty, old scout—these Apache can run!” grunted Sid,
hanging low over his pinto and putting spurs to him. Scotty’s mare
had no idea of letting that pinto leave her, so they galloped away
from San Mateo together, leaving behind a cloud of dust and a riot of
angry war whoops from the red men piling out of the schoolhouse.
Sid’s caution as to the running abilities of the Apache was entirely
true. Behind them streaked out two lean and sinewy bucks, who had
raced out of the school door and were coming after them like arrows.
What was more surprising was the way they kept up that speed. The
mare and the pinto were going like the wind, but not a yard did those
Indians on foot behind them seem to lose! There was not a horse
save their own in sight. But three men and a swarm of children were
already running down the hill to where the ragged poles of a horse
corral and the glint of a watering pond near by shimmered in the
broiling sun. Even barebacked it would be some time yet before
these could join in the chase, but when it was once begun it would
be tireless.
Not a word passed between the boys. Both were watching sharp
ahead for prairie dog holes and urging on their ponies at top gallop.
If they could outrun those two bucks behind them for half a mile they
would have passed the limits of even Apache endurance. Indeed,
before half the distance between them and the friendly hills had
passed, they saw first one, then the other, give up, with arms tossed
up in weary abandon, as both bucks threw themselves panting on
the bare plain. Sid and Scotty then let their ponies ride on at their
own stride. It was well to have an extra spurt left in them to call on,
even yet!
“Mucho bad, Sid; look back!” said Scotty, a short time after the
menace of the foot-racers had disappeared and the two bucks had
risen and begun slowly to retrace their steps back to the school. Sid
turned half around in his saddle. Out from the high ’dobe façade of
San Mateo were riding four horsemen and their leader was swathed
in a gaudy striped Mexican serapé. Surely he was that rascally
Vasquez. And he would follow them until doomsday for the Red
Mesa tablet!
“The whole thing’s bad, Scotty,” replied Sid. “This fellow knows now
what’s written on the tablet. Nothing can take that knowledge away
from him, either. We’ve got the plaque; but he has the knowledge it
contains—and I’ll bet it’s indelible in his mind! They’ll never catch us
with those Indian ponies, but what’s to prevent his reporting this Red
Mesa mine to friends of his down in Mexico? What then?—you can
have my shirt if a squad of their guerrillas doesn’t cross the border,
pronto, and get to Red Mesa first! See it? That’s where we get off. I
doubt if this fellow will follow us very hard. He knows all he needs to
know right now.”
Scotty rode on in silence. Indeed this business had been bungled!
Far better would it have been for them to have ridden into Tucson
and gotten some scientist whom Sid knew and could trust to read the
Latin for them. The very word “Gold” is bad medicine to let get
abroad among the sons of men! Many a miner’s stampede has been
started on less.
As the trail reached the foothills they drew rein and looked back. Far
across the plain that little knot of horsemen was still coming on in the
tireless lope of the Indian pony. Give them twenty miles of it and their
own horses would be run off their feet!
“Here’s where we’ve got to step light and easy, old-timer!” grinned
Sid. “The Indians will be in their own country in these hills, and they
know every short cut to head us off. I wish Big John and Niltci were
here.”
Scotty growled assent abstractedly as they rode up a bare and rocky
arroyo. He was thinking of all that this Red Mesa mine meant to him.
If it really existed, its nearness to the sea made the engineering
problems of it so simple that it would be easy to get capital invested
in it. Las Pintas mines, only thirty miles south of Pinacate, had
already established a successful precedent for that, for it now had a
little railroad of its own and a ship base, just as the young engineer
had dreamed for Red Mesa. But now that Red Mesa’s location was
known to outsiders—and after being buried two hundred years, too!
—the whole thing was a mess, and of his own naïve making. The
curse of trustful youth! There was just one point of hope. According
to government regulations, whoever got there first and staked out a
claim owned Red Mesa, now matter how discovered.
Scotty raged inwardly over it, driving his mare hard under that
maddening goad of chagrin. Sid, who was less interested, followed
phlegmatically behind. As the trail reached up high on the flanks of
the mountains and headed up over a “saddle” into the next valley,
Scotty rode ahead, dismounted and began climbing rapidly up
toward the saw-teeth ridges that hung low in the sky above him. A
persistent suspicion had haunted him ever since this ride had begun,
and now he wanted that suspicion verified or dispelled.
As Sid passed below him then halted his pinto and waited, Scotty
climbed on up and soon was peering through a ragged granite gap in
the ridge. Below him fell away the bare, sage-strewn slopes and the
low ridges of the foothills. Beyond that the great sun-baked plain of
San Mateo lay like a floor. Up on its lonely hill, dim, in the blue
distance, rose the school, yellow, and as Spanish as old Mexico. A
mass of green around it told of water and of its permanent Apache
colony.
Scotty then searched the plain for signs of their pursuers. At first he
thought they had followed them into the mountains, for the plain
below was bare as a table. Then he drew back, with a shock of
intense discouragement and misgiving, for his eyes had at last found
them—riding along under the foothills, toward the south! There were
two of the Indians following Vasquez who was quirting his pony
mercilessly. The third Apache had disappeared.
“Gee!” groaned the boy anxiously. “He’s riding south! Toward the
railroad! That means a telegram as soon as he can send one. And
the third Indian is following us!”
He scrambled down and told Sid his news.
“Kick me for a rank tenderfoot, Sid!” he groaned. “Kick me from here
back to camp, and then kick me clear on down to Pinacate! Gorry,
but I let the cat out that time!”
Sid grinned. “Buck up, old settler!” he cheered him. “I knew we were
in wrong as soon as I saw that greaser schoolmaster. To give the
Red Mesa plaque to some benign old priest to read, yes; but this bird
was just a sinful man like the rest of us. The temptation proved too
strong for him. Gee, but you handed him our dope, as innocent as
innocent! Whee! Big John’ll think up something to do about it,
though, and if he don’t we will. Remember, too, that Mexico is the
land of mañana. I doubt if they even get any one started up from
Sonora before we can make a fast push and get there first, old
scout, so don’t worry. Besides, they can’t cross the border, unless a
party of guerrillas does it. And—they’d have a lot of explaining to do
to get the grant of a claim from the government unless regularly
entered as immigrants through Nogales—which is further from Red
Mesa than we are. Our job, now, is to keep an eye on this third
Indian. He was sent after us as a spy, to keep track of us and report,
you can depend on that. We’ll send Niltci after him.”
Scotty rode on, more hopeful. Sid’s rugged cheerfulness was what
he always needed to brace him up. The one strong note in his
character was his indomitable Scotch persistence. He never let go a
thing once his mind was set on it, but he was easily disheartened
and set back, for he had yet to learn that nine-tenths of our troubles
exist solely in our imaginations.
It was nightfall when they reached camp. Not a sign had they seen of
the third Indian, lurking in the hills somewhere behind them. That he
had seen them was quite to be believed; he was probably watching
their entry into camp at that very moment!
Big John hee-hawed when the boys told their story; then he jumped
up, cackling hideously, grabbed Scotty and booted him all around the
camp. “Thar!—Ye pisen li’l, ornery, horned toad!—Gol-darn ye—
anyhow!” he guffawed, administering that kicking that Scotty had
begged for but Sid had overlooked. “You boys ain’t satisfied with
draggin’ me down to a country glowerin’ with petrified lava, but ye
got to add to my troubles by ringin’ in a bunch of greasers on me! I
tell ye what, Scotty, Pinacate means, ‘Bug-that-stands-on-his-haid,’
in Papago talk, an’ durned ef I don’t stand ye on yore haid, ef we
don’t find no mine—an’ we won’t! Up you goes by the heels, I’ll be
plumb hornswoggled ef I don’t do it!”
“Yeeow—attaboy!” yelled Sid, enthusiastically. “Well, how come?
We’ve got to shake off this Apache, first, or he’ll follow us clear down
to Pinacate. What’s the word, John?”
“My idee’s to do a leetle night ridin’, son—and sorter leave Niltci
behind,” grinned Big John enigmatically. “Might’s well be rollin’ yore
blankets right now, boys. The jerky’s all done and Niltci’s got it
pickled away in a bunch of parfléche skins.”
That night the four horses, with Ruler and Blaze on rawhide leaders,
pulled out of camp in the silence and gloom after dusk. One horse,
Niltci’s flea-bitten mustang, was led riderless, his halter tied to the tail
of Sid’s pinto. The white mustang that bore Big John’s long frame
started ahead up the trail, a guide barely distinguishable in the faint
light of the big Arizona stars. Black and inky buttes, jagged peaks
and swelling ridges passed them in a slow procession around the
horizon while Big John led on, stopping occasionally on the trail to
reassure himself by some blazed stake set up in a cairn of stones or
a rude corner of weathered granite rocks marking a turning point in
the route.
The sun rose over the range of mountains left behind them next
morning as the pack train wound down through the last pass in the
hills and crossed the railroad track above Tucson. The horses were
watered at a little river near the tracks, a river that was bravely
hurrying on to its fate, to disappear forever in the thirsty sands of the
desert to the north. Bare and rocky hills confronted them across the
valley. As they headed into them Sid turned and looked back. A lone
rider came galloping after them like a black speck hurrying out of the
ranges across the valley. The whole party halted waiting for the rider,
whether friend or foe.
It was Niltci, the Navaho, flinging along Indian fashion on a pony, his
elbows flopping jerkily, his whole body swaying with the loose
abandon of a rag tied somehow to the saddle.
“Well?” said Sid, as the Navaho boy overtook them, “what’s become
of Vasquez’s Apache scout?”
Niltci’s bronze face cracked once in a saturnine grin. “Quien sabe?”
(Who knows!) he shrugged his dusty shoulders. “Me got hees pony!”
That was all they ever had out of him about it.
“Them thar rails says we gotta lope along pronto, boys!” said Big
John as he pushed the white mustang to the head of the column.
“Yore schoolmarm friend has gone by hyar, in the cyars, shore’s yore
a foot high. ’Cause why? I didn’t see no pony tracks headin’ down fer
Tucson, nohow, comin’ down this valley.”
“Think he’s gone to Nogales, by train, John?” asked Scotty anxiously.
“Shore has! Or else he’s takin’ the jerkwater local out of Tucson to
San Xavier, so he can reach the Papago Reservation ahead of us.
We’ll be crossin’ thet Injun ole folks’ home soon as we git out’n these
hills an’ we’ll shore hev trouble!”
Big John shook his head ominously and urged on the white mustang.
For him the race for Red Mesa had already begun.
“Yes, but the Papagoes are harmless,” objected Scotty.
“Not this time of year!” put in Sid. “This is corn time with them, and
every other buck is drunk on a ferment that they make of it. That
Vasquez could arouse them to almost anything, now.—Hey, John?”
“Shore, them Injuns is bad medicine for all white men in November!”
quoth Big John sententiously.
They rode on in silence. A row ahead was tolerably certain, Sid
thought. If Vasquez had reached them first by the railroad they would
probably get a hot reception!
Two hours later their cavalcade filed out of the mountains and
headed across a wide and hot plain. It was like riding into an entirely
new world. Odd twisted and contorted cactus vegetation now
covered the desert. Every plant and tree was different from anything
the boys had ever seen before. Even the mountains were different,
for instead of having the usual foothills they rose, gray and jagged
and bare in the blue sky, abruptly from a flat and sandy floor. A faint
tinge of green on their sides showed that the queer vegetation of this
arboreal desert climbed up for a considerable distance even on that
dry and inhospitable soil.
In front of them stretched a wide and flat plain, clear to the bases of
the distant gray mountains. Sparse galleta grass and patches of gray
sand dotted with creosote bushes covered it. There were clumps of
mesquite, looking like dwarfed and twisted locust trees; here and
there a bright green patch which, on riding closer, developed on to a
palo verde, its bright green branches and twigs a dense lacery of
glistening green. Sid rose close to one, looking for its leaves for
apparently it had none. They were infinitesimal, spiky little things,
adding nothing to its beauty, which he saw came entirely from the
palo verde’s masses of sap-green branches.
As they rode further to the southwest, multitudes of what looked like
tall green fence posts appeared. They covered the ridges, each as
straight as a lance and as thick as a tree. They were small saguarro
or giant cactus, ribbed and pleated in green, and covered with
thorns. Further west they grew larger and put forth branches like
huge candelabra.
To Sid’s naturalist soul all this arboreal desert was weird and
beautiful and interesting. The tree choya, a clubby specimen with
stiff branches of thorn bristles at the ends of crooked branches,
began to appear; then the ocatilla, the “Devil’s Chair,” as Big John
called it, a tree with no trunk but with more arms than an octopus
and each branch covered with thorns and small green leaves
bunched along a green stem as hard as iron.
Towards evening, across the gray-green miles, a small brown visita
or mission outpost came to view. It was merely a large hut of adobe,
but the bell in its upper tower told its purpose instantly. The boys
thrilled as they looked at it, for they were now nearing the Papago
Reservation and it was quite possible that Vasquez had forestalled
them by train from Tucson.
Big John reined in the white mustang. “Nobody to home, thar, these
days,” quoth he. “The Injuns is all away at the cornfields. We gotto
ride in thar though, an’ help ourselves to water afore these hosses
kin go further.”
Sid would have preferred to keep away, but there was no choice.
Water was king in this country! They had to get it, if it meant
encountering a thousand malignant school-teachers. Vasquez’s
subtle Spanish mind had no doubt led him to reason that they must
come here. But what redskin reinforcements he might have picked
up in that lonely mission station imagination could not conjecture.
Slowly the miles lessened; the building loomed up brown and
enigmatical in the setting sun before them. ’Dobe houses, each with
a mesquite pole veranda in front, appeared like magic among the
green stakes of saguarros on the hillsides; then a round stone oven
out in the valley near the schoolhouse became plain to sight.
They were perhaps yet a mile away when around the corner of the
building appeared a man on horseback. A cape or serapé of some
sort hung over his shoulders, but it was too far away to get any
sense of color from it. Niltci squinted his keen eyes and gazed at him
long and fixedly while the others reined up.
“Mexicano!” he ejaculated.
“Sho’ is!” agreed Big John. “I’ll bet my hoss it’s that bird who tried to
steal your tablet, boys!”
Sid and Scotty fumbled for their hunting binoculars. A moment later
they had trained them on the man.
“It’s him, John, all right!” cried Sid. “Now what do we do?”
The rider in the serapé answered that question himself, for, wheeling
his horse, he galloped off at full speed.
“Ride, fellers! Burn it up!” roared Big John. “We got about no time to
git in thar an’ water our hosses. He’ll be back, right sudden, with the
hull b’ilin’ of drunken Injuns!”
CHAPTER IV
PINACATE
IN a lather of foam the four horses raced in to the deserted Papago
village. ’Dobe houses with small blunt chimneys dotted the hillside,
but there was not so much as a dog in sight. The well was easy to
find—a cube of palings built around a curbstone to keep wandering
burros from falling in. It topped a low knoll and had a primitive
windlass lowering a bucket into its depths.
Ten minutes of sweating activity followed, Sid and Scotty scanning
the hills anxiously while each horse drank his fill; the two dogs
lapped up a hatful from Big John’s sombrero; then all the canteens
were filled.
“Now roll yore tails, boys!” urged Big John, flinging himself up on the
white mustang. Sid looked to his stirrups and mounted the pinto in a
running jump. Blaze and Ruler barked excitedly as the horses
clattered up a steep slope that led through a gap in the hills. What
might be on the other side of that ridge!
From its summit they saw a wide arboreal desert stretching away
below, bounded on the west by a red, saw-tooth range of silent
mountains. The rays of the setting sun swept across the plain,
lighting up each saguarro pole in a spike of vivid green. But over in
the hills to the east was coming a long file of riders—the Papagoes!
They wound down a defile, galloping at full speed, and a tiny
horseman swathed in a flying, striped serapé led them.
“Now, fellers, we shore got a race ahead of us!” declared Big John.
“We’ll make for Red Tank, out thar in the middle of this valley. See
them two little ’dobe houses? That’s her. Head for them ef any of ye
git separated.”
Across the waste of creosote bushes, choyas and giant cactus that
was the Baboquivari Desert galloped the whole party, heading due
west toward the red water pond which lies about the center of it.
Near its borders Sid could see the two ’dobe Papago houses, still ten
miles off, yet they showed as tiny landmarks, even more noticeable
than the many-branched giant saguarros which dotted the plain.
Beyond them rose the Quijotoa mountains, abrupt and sheer, bare
as the ribbed sides of a cliff. They were twenty miles away, but
seemed quite neighborly, a refuge to ride for, a place for a stand-off
fight if need be.
“Gee!—regular movie stuff!” chortled Sid to Scotty as he looked back
over his shoulder again. Vasquez and his muster of motley
Papagoes were crossing from the east but had not gained a yard on
them yet. But they surely would, by the time those ’dobe houses
were reached! The horses could keep their distance easily—at first.
In time these tireless Indian mustangs would ride them down, sure
as death!
“We’ll stop and stand ’em off from those ’dobe houses, eh?”
answered Scotty. “My old .405 will be the boy then, you bet!”
“Won’t be no movie scrap, nohow!” growled Big John back from
where he and Niltci were breaking trail. “The real thing don’t pan out
that way. Ride, fellers! All tarnation won’t stop these horses from
drinkin’ up the pond when we git thar, an’ we gotto make time so’s to
let ’em do it. You, Blaze,” he stormed at the big Airedale loping along
beside him, “I gotto turn ye loose, now, spite of thorns ketchin’ yore
coat. Cayn’t take no more chances with this leader.”
Big John hauled up the huge furry Airedale on his saddle as he rode,
unsnapped the leash and let him drop again. Twice before during the
race the white mustang and Blaze had run on different sides of the
same bush—with almost disastrous results but he had been still
more afraid of thorns catching and holding the woolly-coated
Airedale. Ruler had no such danger. The big hound loped along
easily beside Sid’s pinto and his sleek sides passed the thorns like
silk.
In half an hour more of twisting and turning through the arboreal
desert seven miles of the distance had been covered. They still
maintained perhaps two miles of lead over the Papagoes, in spite of
the furious urgings and gesticulations of their leader in the striped
serapé.
Big John glanced a sardonic eye back at him occasionally. “Greaser
—I’d plumb dote on stoppin’ a leetle lead with ye!” the boys heard
him mutter through his clenched teeth, as he galloped along. “But
them good old days is gone forever, now. We gotto put up a tin-horn
game on ye instead.”
Just what the hoax was going to be neither Sid nor Scotty could
conjecture, but they knew Big John’s resourcefulness of old. They
rode on silently, wondering, nursing the horses around the surprising
twists and turns that Niltci ahead saw fit to make, usually to avoid
great beds of bristly choyas. Both the mare and the pinto were
breathing heavily now, and snorting in labored wheezes through their
foaming nostrils. The pace was beginning to tell! The ’dobe houses
loomed up not two miles off, but behind them came that tireless knot
of Papago riders, light and lithe, and they could keep this up all day!
Then came a yelp of pain from Blaze. The Airedale, in leaping to
avoid a spiky choya, had slammed full into a bushy acacia whose
incurved cat claw spines showed no intention of letting go again.
Doglike, he stopped still, waiting for his master to extricate him and
not trying to tear himself loose. Big John let out a round oath and
flung himself from the white horse while the rest all stopped.
“Get out yore .405 and let her talk, Scotty,” he barked, “she can
outrange anything they’ve got, an’ this-yer dawg’s goin’ to make us
take time out.”
Faint yells from their pursuers and the waving of rifles by upflung
arms greeted the stoppage of their party. The cowman cut rapidly at
the tufts of kinky hair that held Blaze fast, while Scotty yanked out
his big rifle and ran back a short way to hide behind the cover of a
giant saguarro. The distance between the parties closed up rapidly;
to one mile, to half a mile, while Blaze whined and groaned, with
mute fang laid protestingly on Big John’s bony hands as one by one
the cat-claws were cut loose from his coat.
Then the .405 whanged out and its bullets screamed high in the air.
A puff of dust flew up in front of the Mexican rider’s mustang and he
checked his horse viciously. The Indians around him, looking more
like a collection of disreputable tramps than the real thing, reined up
and presently puffs of white smoke came from them, followed by the
faint pop of their weapons.
At one of the shots Niltci suddenly threw up his arms and tumbled off
his horse. Sid gasped with dismay, but to his astonishment the
Indian boy was now wriggling off through the sage like a snake! He
left his gaudy Navaho blanket behind, though, and Sid caught Big
John’s eye winking at him. Evidently this was part of a ruse!
“You, Sid—make believe you was bending over something,” grunted
Big John. “Thar, Blaze, yore free, old-timer! Now bring me that flea-
bitten cayuse of Niltci’s, Siddy boy.”
Grinning, the youth held Niltci’s horse for him while Big John flung
the blanket over Blaze, lifted him up on the saddle, and sprawled him
out with his collar tied fast to the pommel horn. “Come on in, son!”
roared Big John to Scotty as he threw a turn of rope around the
dog’s back and vaulted up on the white mustang himself. “Now ride
for all yore wuth, boys!”
“But Niltci—how come?” gasped Sid. “Are we going to leave him?”
“Never mind Niltci—he’s some busy, ’bout now. Hep, boys!” retorted
Big John, putting spurs to the mustang. Indeed, as Sid looked
around for him, Niltci had disappeared as if the earth had swallowed
him up. He himself rode on lightheartedly. Shots rang out behind
them and the puff of sandspurts kicked up the desert floor near by,
but the Papagoes’ shooting was wild and the range a good deal too
great as yet. The four horses swung down toward the first ’dobe
house and Big John quickly led Niltci’s cayuse behind it and stopped
them all.
“Them Injuns may hev taken Blaze under the blanket fer Niltci
wounded—an’ again they mayn’t! We’ve got ’em guessin’ anyhow,”
he grinned, peering out around the corner. “Sid, you take the hosses
to the pawnd, an’ water ’em, while Scotty and I sorter dally with
these excited hombres a leetle.” He dragged out his old meat gun, a
.35 with a mouth like a young cannon and a knockout punch.
“C’mon, Scotty, le’s mosey!”
Around the corner of the house they looked out and back across the
plain. The Mexican rider had reined in at long rifle range. His Indians
were dismounting and creeping out through the bushes to right and
left while one of them held all their horses by a handful of halter
ropes. Finally the Mexican also dismounted and joined them in the
ambush attack. Their idea was evidently to creep up close and then
carry the house by a simultaneous rush.
“Fooled ’em, all right!” grinned Big John. “They shore think that Niltci
got hurt in the shootin’ an’ we brought him in hyar lashed to his
saddle. Let ’em come! You an’ I mought’s well be a-sprinklin’ the
sage, Scotty, so as to make it more excitin’. Don’t shoot nobody—
tain’t wuth it.”
He went to the other corner of the house and opened fire with the
.35. Nothing loath, Scotty tore loose with the monstrous shout of his
big .405. It made a fine noise, and its bullets ripped and ricochetted
across the sand, throwing up small shell-spouts like a naval gun.
Answering shots and the whizz and smash of lead bullets striking the
building told the youth that this was not all play. Whatever story
Vasquez, if it was he, had told the Papagoes it had evidently aroused
them to an unwonted fury. It all seemed incredible, preposterous to
Scotty. The Bean-Eaters were the most peaceful of red men. Were it
not corn time he could not have believed that they were really
fighting in earnest.
“Got them hosses watered, Sid?” called out Big John presently.
“Bring ’em hyar; show’s comin’ off, pronto.”
Sid led the horses back under the shelter of the house and ran to
help in the defense. Shots rang out in the sage, coming from both
sides on their flanks. It was getting high time to move on, before one
of the horses should be hit. Sid aimed carefully behind a puff of white
smoke that rose from a creosote bush at his right, and let go with his
.30 army carbine. Before he could watch the result a yell and a shout
of laughter from Scotty spun him around. Out there on the plain a
funny thing was happening. The Indian in charge of the Papagoes’
horses had now apparently mounted one of them and was riding off
with the entire bunch!
It was several seconds before Sid realized the truth—that that white
rider with the red bandanna about his forehead could be none other
than Niltci himself! While Sid had been shooting, the Navaho boy
had crept up through the sage, knocked down the Papago holding
the horses and ridden off with all of them!
At sight of this disaster a chorus of vengeful whoops rose out of the
desert all around them and two or three Papagoes leaped from cover
in a futile spurt to catch the runaways. Sid could have bowled them
over easily but he was instantly recalled by Big John’s shout.
“Mount and ride, boys!” the big cowman was yelling. He himself
leaped up on the white mustang and the boys followed hard after,
riding along the banks of the red pond. A flock of teal rose in a great
flutter of wings and there were yells and imprecations behind them
from out in the creosote bushes, but they waited not to hear them.
Big John was guffawing so that he could hardly keep his saddle.
“Sing, redskins!—Yell, ye pisen horned toads! Ain’t it a grand an’
glorious feelin’ to be set afoot though!” he shouted back at them.
“Gosh durn it, boys, I ain’t hed so much fun since we made Apache
Sam eat a rattlesnake! Niltci an’ I, we cooked up thet hoss-thievin’
stunt whilst ridin’ out hyar. Blaze, he jest nat’rally helped!”
As for Niltci, he was now making a wide circle around the other side
of the pond, leaving behind him the screaming and fist-shaking
Vasquez, who stood in the sage searching his soul for Spanish
expletives that would relieve his feelings! Niltci rode in to join them
shortly after, with all the Papago ponies following him and a broad
grin on his face.
“Mucho bueno!” he grunted. “What do with pony?”
“Oh, we’ll pilgrim along a while, an’ then drop ’em after dark
somewhar near the Quijotoas,” laughed Big John. “Fine work, Injun! I
reckon we’re shut of that outfit for a piece, eh, boys?”
“Not to be a crape-hanger, I’d say that we won’t see another Mexican
unless it’s a bunch of guerrillas down near Pinacate,” said Sid.
“Shore! More fun!” grinned Big John. “Them rebel greasers has
Mausers—but they cayn’t hit nawthin’ with them. Hope that Vasquez
person aims to round ’em up an’ bring ’em along. ’Twell be some fine
li’l party, I’m settin’ hyar to tell ye.”
They rode on and dropped the Papago ponies shortly before pushing
through the pass in the Quijotoas to Poso Blanco. There they
encountered a new village of Papagoes and the inhabitants lined up
to watch them go by. Big John, nothing loath, bought oats from them,
as friendly as friendly! They, of course, had heard nothing of the row
over at Red Tank. Some of them even did their best to sell the party
baskets!
“Shore, but a runner from Red Tank will git in hyar late to-night,
fellers,” quoth Big John, as they rode out on the desert once more.
“This lot of Injuns’ll be some surprised, I’m thinkin’! We’ll water at
Poso Blanco an’ pull our freight for ole Montezuma Haid early to-
morrow morning, or the hull kadoodle will be on our heels.”
After dark a dry camp was made, in a patch of mesquite and palo
verde, a long distance out from Poso Blanco. It had been a hard day
of riding! Fifty miles, in all, had they covered, and now the country
was changing from gray to red, and lava began to show up, black
and glowering under the horses’ hoofs.
It was sharp and chilly in the dark before dawn when Big John
roused out the camp next morning. “Now, fellers, we’ll water for the
last time at Wall’s Well by sun-up, an’ then make a long pull through
the gap in the Growlers, which-same brings us to Represa Tanks on
the Camino del Diablo. You-all hev never been thar, an’ hev no idee
what it’s like, but the Spaniards told the truth, fer once, when they
named it the Road of the Devil. Thar’s always water in Represa, an’
from thare we kin work out to Cerro Colorado, the first of them
extinct volcanoes. If Red Mesa’s twenty mile northeast of Pinacate,
as that pottery slate says, you’ll see her from thar.”
The horses, freshened and invigorated with grass feed and the cool
of night, led off spiritedly, all four riding together in a bunch. In two
hours more the sky began to lighten in the east and then a shaft of
red sunlight struck into living fire the top of a mountain that rose
ahead of them, solitary and shrouded like a monk—Montezuma’s
Head. Sid held his breath in wonderment, to see the red bath of color
spread down the flanks of that huge and imposing presence,
widening and broadening its base with color, bringing out the vivid
green posts of saguarros, the dark greens of creosote, and the white
patches of barrel cactus wrapped in their dense mantles of thorns.
They were in the heart of the giant cactus country now. The floor of
the desert was dotted all over with them. Everywhere their weird
candelabra shapes stood like sentinels, upholding bent and
contorted arms, notes of bright green on a gray and pale green
waste.
As they rode nearer, Sid raised a shout of discovery. “First organ
pipe cactus!” he whooped, pointing excitedly. “See it? Up yonder on
the hill!”
Out of a cleft in the rock rose a nest of what seemed to be tall and
crooked green horns, bunched together like some coral growth of the
depths of the sea. A queer plant, but all this country was filled with
these dry-soil and water-storing species, and nature did queer things
with them to make them able to survive.
Under the towering ramparts of Montezuma’s Head the horses were
watered and canteens were filled. The wide flat stretch of arboreal
desert across to the Growlers lay before them. It would be twenty
miles of riding in the hot sun. Extra bags of feed were bought and
hung over the saddle bows before they started, and from a lone
cowman, an old settler who had come here for peace and quiet, Big
John borrowed a five-gallon canvas water bag.
That “valley” was a flat stage floor, surrounded by an amphitheater of
bare, granite mountains. They rose all about them, interminable
distances away. Yet every mile of that crossing proved interesting,
for the boys never grew tired of studying this abundant desert plant
life. Saguarros in troops and regiments marched up and over the
ridges or filled in the foregrounds of mesquite and palo verde at
appropriate intervals. Patches of galleta grass that simply could not
be ignored invited the horses to a step and a munch of fodder.
Gambel’s quail ran through the bushes in droves and caused many a
chase and much popping of the small six-shooters that the boys
carried. An occasional road runner darted through the creosotes,
long-legged and long-tailed. Desert wrens sang from the white
choyas where their nests lay adroitly concealed from predatory
hawks. It was high noon before the Growler mountains were
reached. They rose abruptly out of the plain, so very steep and
sudden that Scotty was convinced that the foothills that properly
belong to all mountains must lay buried in the sand underneath the
horses’ hoofs. A minute before, the cavalcade had been trotting
easily across a table-land like a hall floor; in the next step the horses
were laboring up a steep and rocky trail that raised them higher and
higher with each step.
At an elevation of some eight hundred feet they paused in a gap that
broke through to the west and the party spied out the land spread
out like a map below. Red and jagged mountains rose across the flat
valley of a red and scowling land below them. A blue haze
enveloped it all, out of which rose dark purple cones of extinct
volcanoes, hundreds of them. It all seemed a black and purple mass
of peaked hills, devoid of vegetation, sizzling in the sun. “Petrified
hell,” Big John had well named it!
As they looked, the haze of vapors shifted slowly, and out of the far
distances appeared for a brief while a faint line of higher mountains,
culminating in a couple of smooth and wrinkly teeth etched faintly
against the blue.
“That’s old Pinacate, boys,” said Big John. “Look hard at her; for you
won’t see her again for a long while yet.”
“Pinacate or bust!” said Sid solemnly. “Red Mesa must be
somewhere between here and it, then, John, since we are now due
northeast of the old boy.”
“Mebbe,” retorted Big John, shaking his head. “Search me! If thar’s a
mesa, such as we have up in the Hopi country, anywhere down hyar
—I’ll eat it! Hey, Niltci!”
The Navaho youth grunted negatively. He had the keenest eyes of
them all. If there was a mesa, such as he was familiar with in his own
country, he would have been the first to spy it out and exclaim over
it.
“Welp! Let’s get movin’,” said Big John. “Thar’s a leetle tank
somewhere down this trail, ef she ain’t gone dry. She don’t last long
after the rains in this country.”
He and Niltci started on down the granite, but Sid and Scotty tarried
to look out once more over this lava land, iron-bound and torrid in the
heat of midday.
“Lord, what a country!” exclaimed Scotty, dejectedly. He was
disturbed to find himself frankly afraid of it. Nothing here to exercise
his constructive engineering instincts upon! Nothing—but Death!
“To me it’s a challenge,” retorted Sid brightly. “It’s still another mood
of grand old Dame Nature, of whose wonders there is no end! She
cares nothing at all for Man; but each new aspect of her is a
challenge to him to stay alive, if he dare. Doctor Hornaday”—Sid
pronounced the name with all the fervor of boyish hero-worship—“he
dared this country once, and discovered that mountain sheep and
antelope had a refuge here. Those granite mountains across from us
to the north of Pinacate are named after him. This lava looks good to
me, for it makes a game sanctuary of this country forever. Except for
your sake, old man, I’d rather there never was a Red Mesa mine.”
Scotty shrugged his shoulders impatiently. He was fast falling into a
mood that had often been fatal to him before, that of trying to rush a
thing through, jumping to a conclusion on presumptive evidence and
then acting on that conclusion immediately, without trying out that
homely old remedy known as “sticking around a bit.”
“Well, le’s push through to Cerro Colorado and have it over with,
Sid,” he urged. “If there’s no Red Mesa, the sooner we find it out and
get away the better.”
But by nightfall they had reached only Represa Tank. It was an
enormous run that their tired horses had made, for that hot country,

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C:11-5 b, c, and f. A domestic S corporation can be a shareholder in a Qualified Subchapter

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C:11-15 A post-termination transition period generally is a one-year period immediately following

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Similarities among all three returns:

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Issue Identification Questions

pp. C:11-7 through C:11-9, C:11-13 through C:11-18, and C:11-38.

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Copyright © 2019 Pearson Education, Inc.

b. $35,910 total tax if dividend of $80,000 paid, calculated as follows:

c. $36,555 total tax if salary of $80,000 paid, calculated as follows:

d. Parts a – d variation with Delta being an S corporation.

Excess net Net

Tax = 0.21 x $87,344 = $18,342

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C:11-36 a. S corporation ordinary income:

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c. Stock basis adjustments:

Beginning basis $100,000 $100,000

Michael: $125,000 x 10% x 203 = $ 6,952

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Al: OI: $180,000 x 50% = $ 90,000

Sec. 1231: $ 75,000 x 50% = 37,500

Sec. 1231: $ 75,000 x 50% x 95 = 9,760

Patty: OI: $180,000 x 50% x 270 = $ 66,575

Sec. 1231: $ 75,000 x 50% x 270 = 27,740

Al: OI: $180,000 x 50% = $ 90,000

Sec. 1231: $ 75,000 x 50% = 37,500

Ruth: OI: $ 47,500a x 50% = $ 23,750

Patty: OI: $132,500b x 50% = $ 66,250

Sec. 1231: $ 75,000 x 50% = 37,500

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Allocation to Shareholder Boba Aliceb Carterc Miked Total

b. Adjusted basis = $26,000 + $10,981 - $915 - $549 = $35,517

pp. C:11-19 through C:11-21, C:11-35, and C:11-36.

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Daily allocation: Pre-7/1a Post-6/30b

b 184 x Amount = Amount allocated to post-June 30 period

Post-June 30: Ordinary income: $125,000 - $25,000 (allocated to C short year) =

pp. C:11-19 through C:11-23.

c. Betty: $60,000 salary and $240,000 ordinary income.

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