roblems (80 Points)-You must show your calculations to receive full credit. 6. P

Question

roblems (80 Points)-You must show your calculations to receive full credit. 6. Pearlie, a sole shareholder, has a $15,000 stock basis and a $7,000 basis in a loan that she made to Lexus, a calendar year S Corporation with no AEP. At the beginning of the tax year, the corporation's AAA and OAA balances are zero. Ordinary income for Lexus also received $5,000 of tax-exempt interest income during they distributed to the year is $20,000. ear. Cash of $50,000 is Pearlie on November 15. What are the tax implications of this distribution?

Explanation / Answer

Pearlier basis in the S corporation would be 15000+7000 = $ 22000. However 7000 here is debt basis which is not reduced by nondividend distributions (distributions other than from accumulated earnings and profits). though it reduces stock basis as per provisions of Sec. 1366(d)

Distribution of $ 50000 shall be treated as follows

Now here, after ending current year income, Pearlier has only $ 40000 of stock basis in Lexus. Thus $40,000 of the distribution is a tax-free return of basis. The $10,000 distributed in excess of A ’s basis in the S Co. stock is treated as amounts realized on the sale of the stock, resulting in capital gain.

Hope this helps, if not, please let know before giving the negative rating, I am sure we can work it through. Thanks

Begining Balance $ 15000 Increase for income ordinary $ 20000 Increase for tax exempt income $ 5000 Reduce for distribution -$40000 Ending Basis 0

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