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Unformatted text preview: upon this rule and the information in the question, Baker's basis is calculated as follows:
Plus: Ordinary income
Less: LT capital loss
Baker's Basis $ 25,000
$ 23,000 Baker's basis should then be compared to the amount distributed to determine how much constitutes
return of capital. In this instance, $23,000 would be nontaxable return of basis, and the remaining $7,000
would be taxable capital gain to Baker.
Choice "a" is incorrect. Baker's basis is less than the cash distributed so there would be some gain.
Choice "b" is incorrect. This choice does not take into account the current year activity of the S
corporation in determining Baker's basis.
Choice "d" is incorrect. Based upon the above rule, amounts distributed to the extent of the shareholder's
basis are not taxable.
Note: This question is the official released question of the AICPA. The question appears to assume that
the S corporation was organized as such and has no prior C corporation earnings and profits. If this were
the case (i.e., corporation E&P exist), ordering rules for distributions would apply, and...
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- Fall '10
- The Land