[needhelpnow]

Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation.

The S corporation had the following balances at the beginning of its tax year:

Accumulated adjustments account $ 8,000

Accumulated earnings and profits $ 10,000

Paul’s stock basis was $20,000 at the beginning of the tax year.

The S corporation made a distribution of $19,000 to Paul during the year.

What is Paul’s stock basis at the end of the year?

A. $1,000

B. $2,000

C. $11,000

D. $12,000

The correct answer is C.

Paul’s basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul’s basis ($20,000 – $8,000 – $1,000 = $11,000).

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I understand that 20,000-8,000….BUT where is the 1,000 coming from? Please explain. Thank you!

[leglock]

Of the 19 distribution, 8 is from aaa leaving 11. U only have 10 in eandp so there is 1 remaining. So the 8 and the 1 reduce the original basis of 20 to 11

[Author]

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