Introduction and Operating Rules
Jeff is the sole shareholder of a C corporation. In 2007, the corporation sold a capital asset for a gain of
$20,000. Jeff is required to report the capital gain on his individual income tax return for 2007, and the
gain is subject to a maximum rate of 15%.
Shareholders do not report capital gains from a C corporation.
Herman and Henry are equal partners in Badger Enterprises, a calendar year partnership. During the year,
Badger Enterprises had $305,000 gross income and $230,000 operating expenses. Badger distributed
$20,000 to each of the partners. Herman and Henry each must report $37,500 of income from the
The partnership is not a taxpaying entity. Its profit (loss) and separate items flow through to the partners.
The partnership’s Form 1065 reports net profit of $75,000 ($305,000 income – $230,000 expenses).
Herman and Henry both receive a Schedule K-1 reporting net profit of $37,500. Each partner reports net
profit of $37,500 on his own return.
Robin is a 50% shareholder in Robin-Wren, an S corporation. Robin-Wren earned net income of
$100,000 during the year, and Robin received a distribution of $35,000 from the corporation. Robin must
report a $35,000 dividend on his individual Federal income tax return (Form 1040).
The shareholders of an S corporation report their shares of net income or loss, regardless of how much of
the income was withdrawn from the corporation. Robin must report income of $50,000.