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The income and other tax attributes of the corporation flow through tothe owners of the S corporation. Troy owns 60% of Oiler and mustinclude $34,800 ($58,000 x 60%) in his gross income. He is also alloweda charitable contribution deduction of $4,800 ($8,000 x 60%). The$13,200 ($22,000 x 60%) of cash dividends he receives is a return ofcapital. The $5,400 ($9,000 x 60%) of nondeductible expenses allocatedto Troy represents a loss of capital that reduces his investment. Thisresults in a basis of $99,400:Basis at beginning of year$ 88,000Add:Share of income34,800Deduct: Charitable contribution deduction(4,800)Nondeductible expenses(5,400)Cash dividends received(13,200)Adjusted basis at end of year$ 99,400b.What is the amount of Troy's gain or loss if he sells the 600 shares for$100,000 to an unrelated person at the beginning of next year?Troy's stock basis is $99,400 at the date of the sale. Therefore, thecapital recovery concept provides that Troy will realize a gain if theamount realized (sale price) is greater than the adjusted basis. Forexample, if the sale price is $100,000, a gain of $600 ($100,000 - $99,400)is realized.If the sale price is less than the adjusted basis, Troy will not haverecovered his capital (stock basis). Therefore, a loss is realized. Forexample, if the sale price is $95,000, a loss of $4,440 ($95,000 - $99,400)is realized.
9-28Chapter 9: Acquisitions of Property34.Erin purchases 2 acres of land in 2006 by paying $4,000 in cash at closing andborrowing $40,000 to be repaid at $8,000 per year for the next 5 years withinterest on the unpaid balance at 10%. In addition, Erin agrees to let the sellerstore farm equipment on the land for 2 years (rental value of $1,000 per year).In return, the seller agrees to pay the $800 in points required to obtain the$40,000 loan. Erin also pays legal and abstracting fees of $700 on thepurchase. a.In 2007, Erin pays $250 in property tax on the land. In addition, the countypaves the road that runs by the land and assesses each taxpayer $1,300 forthe paving. What is Erin's adjusted basis in the land at the end of 2007?Erin's initial basis in the land is equal to the purchase price of the land.In this case, the $44,000 ($4,000 of cash and the $40,000 of debt) must beadjusted for the payments made between Erin and the seller. The use ofthe land is equivalent to Erin paying the seller $2,000 and is added to thepurchase price. The payment of Erin's points by the buyer is equivalentto a cash payment back to Erin and reduces the purchase price. Theattorney and abstracting fees are a cost of acquiring the land and areadded to Erin's initial basis of $45,900. The property taxes are deductibleas itemized deductions. The paving assessment is not a tax and isadded to the basis of the land. Erin's adjusted basis increases to $47,200($45,900 + $1,300).Cash paid$ 4,000Amount borrowed (paid to seller)40,000Value of rental to seller (2 x $1,000)2,000Points paid by seller on Erin's loan(800)Attorney and abstracting fees700Initial basis in land in 2006$ 45,900Paving assessment1,300Adjusted basis in land in 2007$ 47,200Note: The interest payments on the loan are not capitalized as part ofthe cost of acquiring the land. The interest paid each year must bededucted under the appropriate rule for deducting interest (e.g., if the