[Anonymous]

Hello,

I sit for REG next Friday and I am going over the practice SIMS. In the first testlet there is one for the S-Corp.

The first point is for the S-Corp’s gain recognize on the distribution of the land. I got to $100,000 by taking the $700,000 FMV transferred to the shareholder and subtracted by half the land on the trial balance. If this is not the right way to $100,000, does anyone know the correct way?

Fred’s stock basis was simple enough, just pull the data from the K-1.

Everything else is throwing me for a loop. Does anyone know the rationale behind all the answers?

Thank you and good luck everyone!

[Pluck]

Hopefully I'm not too late.

I believe you're essentially right. The information in the question states that they are distributing 10 of the 20 acres. The trial balance shows the land as being worth $1,200,000 in total which also agrees to the depreciation worksheet for the land. So the basis to the S corp of the 10 acres distributed is half of the $1,200,000 which is $600,000. The materials then say the land has an FMV of $700,000, so the corp has a $100,000 gain on the distribution of the land.

So, Grape corp has a $100,000 gain. Since Fred and Melissa are each 50% owners, they each recognize 50% of the gain on distribution since the S Corp is a pass through ($50,000 each). The cash distributed to Melissa is irrelevant to any of the questions. The distribution would simply reduce Melissa's basis.

There is no debt basis because this is an S corp. The shareholder's do not share the debt as they would in a partnership unless they made a loan directly to the S corp.

Fred gets the $700,000 FMV as his basis in the property since there is tax on the gain of the distribution.

[DoubleBogey]

Testlet 4 Sim #1. Everything was pretty straight forward except for the last question: Remaining basis using the accrual expense method since purchase. i have no idea where to even start with that one and can't even back into the answer.

[Author]

Replies