# The income and other tax attributes of the

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The income and other tax attributes of the corporation flow through to the owners of the S corporation. Troy owns 60% of Oiler and must include \$34,800 (\$58,000 x 60%) in his gross income. He is also allowed a 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 of capital. The \$5,400 (\$9,000 x 60%) of nondeductible expenses allocated to Troy represents a loss of capital that reduces his investment. This results in a basis of \$99,400: Basis at beginning of year \$ 88,000 Add:Share of income 34,800 Deduct: Charitable contribution deduction (4,800) Nondeductible expenses (5,400) Cash dividends received (13,200 ) Adjusted basis at end of year \$ 99,400 b. 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, the capital recovery concept provides that Troy will realize a gain if the amount realized (sale price) is greater than the adjusted basis. For example, 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 have recovered his capital (stock basis). Therefore, a loss is realized. For example, if the sale price is \$95,000, a loss of \$4,440 (\$95,000 - \$99,400) is realized.