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.
9-28 Chapter 9: Acquisitions of Property 34. Erin purchases 2 acres of land in 2006 by paying $4,000 in cash at closing and borrowing $40,000 to be repaid at $8,000 per year for the next 5 years with interest on the unpaid balance at 10%. In addition, Erin agrees to let the seller store 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 the purchase. a. In 2007, Erin pays $250 in property tax on the land. In addition, the county paves the road that runs by the land and assesses each taxpayer $1,300 for the 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 be adjusted for the payments made between Erin and the seller. The use of the land is equivalent to Erin paying the seller $2,000 and is added to the purchase price. The payment of Erin's points by the buyer is equivalent to a cash payment back to Erin and reduces the purchase price. The attorney and abstracting fees are a cost of acquiring the land and are added to Erin's initial basis of $45,900. The property taxes are deductible as itemized deductions. The paving assessment is not a tax and is added to the basis of the land. Erin's adjusted basis increases to $47,200 ($45,900 + $1,300). Cash paid $ 4,000 Amount borrowed (paid to seller) 40,000 Value of rental to seller (2 x $1,000) 2,000 Points paid by seller on Erin's loan (800) Attorney and abstracting fees 700 Initial basis in land in 2006 $ 45,900 Paving assessment 1,300 Adjusted basis in land in 2007 $ 47,200 Note: The interest payments on the loan are not capitalized as part of the cost of acquiring the land. The interest paid each year must be deducted under the appropriate rule for deducting interest (e.g., if the

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