Subsequent losses eliminate the shareholders stock basis and reduce a portion

Subsequent losses eliminate the shareholders stock

This preview shows page 35 - 43 out of 63 pages.

Subsequent losses eliminate the shareholder’s stock basis and reduce a portion of the debt basis. The S corporation repays $20,000 of the $100,000 loan when the shareholder’s basis in the loan is $75,000. The shareholder must report a capital gain in the amount of $5,000 on the receipt of $20,000, since 25% of the face value was not supported by debt basis [$20,000 x ($100,00 - $75,000)  $100,000]. Chapter 21, Exhibit 10d
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CCH Federal Taxation Comprehensive Topics 36 of 63 FACTS: David, an individual, owns all of the shares of an S corporation throughout 20x1. The corporate books show the following information for 20x1:QUESTIONS:(1) Compute 20x1 Code Sec. 702(a)(8) taxable income(2) Compute David’s stock basis at 12/31/x1.(3) Compute David’s “at risk” amount at 12/31/x1.(4) Compute David’s AAA balance at 12/31/x1.(5) Compute David’s debt basis at 12/31/x1.Effect of Operating Results on Basis—Example Chapter 21, Exhibit 11a
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CCH Federal Taxation Comprehensive Topics 37 of 63 $ (10,000) $ (10,000) $ (10,000) (sep’ly. stated) $ (10,000) Code Sec. 1231 loss 10,000 10,000 10,000 $ 10,000 10,000 Code Sec. 1245 gain (10,000) (10,000) (10,000) (10,000) (10,000) Overhead expenses (100,000) (100,000) (100,000) (100,000) (100,000) Cost of goods sold 200,000 200,000 200,000 $ 200,000 200,000 Net sales $ 0 $ 0 $ 10,000 $ 10,000 $ 10,000 Initial bases, from $10m stock purchase on 1/1/x1 (5) Debt Basis (4) AAA Basis (3) At Risk Basis (2) Stock Basis (1) Code Sec. 702(a)(8) TI Corp. Books: Effect of Operating Results on Basis—Example Chapter 21, Exhibit 11b
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CCH Federal Taxation Comprehensive Topics 38 of 63 $(10,000) $(10,000) (sep’ly. stated) $(10,000) Lobbying expense - state officials (not deductible) 15,000 15,000 (sep’ly. stated) 15,000 Tax-exempt interest income $10,000 10,000 10,000 (sep’ly. stated) 10,000 Long-term capital gain (10,000) (10,000) (10,000) (sep’ly. stated) (10,000) Short-term capital loss $(10,000) $(10,000) $(10,000) (sep’ly. stated) $(10,000) Charitable contributions (5) Debt Basis (4) AAA Basis (3) At Risk Basis (2) Stock Basis (1) Code Sec. 702(a)(8) TI Corp. Books: Chapter 21, Exhibit 11c Effect of Operating Results on Basis—Example
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CCH Federal Taxation Comprehensive Topics 39 of 63 $10,000 $80,000 $115,000 $95,000 $100,000 $125,000 Balances, 12/31/x1 (10,000) (10,000) (10,000) (10,000) Cash distribution to David 10,000 10,000 10,000 10,000 David’s additional stock purchases of S corp. stock 10,000 S corp borrowings from banks—NONrecourse to David. 10,000 10,000 S corp borrowings from banks—recourse to David $10,000 $ 10,000 $ 10,000 David’s loan to S corp. (5) Debt Basis (4) AAA Basis (3) At Risk Basis (2) Stock Basis (1) Code Sec. 702(a)(8) TI Corp. Books: Chapter 21, Exhibit 11d Effect of Operating Results on Basis—Example
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CCH Federal Taxation Comprehensive Topics 40 of 63 Distributions—Effect on S Corporation Does an S corporation recognize gain or loss on the distribution of cash to shareholders? No, never. Chapter 21, Exhibit 12a
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CCH Federal Taxation Comprehensive Topics 41 of 63 Does an S corporation recognize gain or loss on the distribution of other property (other than its own stock)? Gains: Yes (compute gain in the same way as if the property were sold) Losses: No (except in complete liquidation). Chapter 21, Exhibit 12b Distributions—Effect on S Corporation
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CCH Federal Taxation Comprehensive Topics 42 of 63
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