[donnychristal]

Becker, an individual, owned 100% of Alpha, an S Corp. At the beginning of the tear, Baker’s basis in Alpha was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Becker?

A. $0
B. $5,000
C. $4,000
D. $7,000

The answer is C. I chose D. My thinking process is that the income of $1,000 and capital loss of $3,000 netted to a decrease in shareholder’s basis in the amount of $2,000. Thus Becker has a basis of $23,000. So the first $23,000 distribution is reducing the stock basis to zero, and the remaining $7,000 should be treated as long-term capital gain.

Can someone help me to understand where did I get it wrong?

FAR - 75
AUD - 64/71
BEC - 85

[taxgeek83]

It has to do with ordering rules in the calculation of the taxpayer's basis in the S corp.

https://www.thetaxadviser.com/issues/2014/jan/nitti-jan2014.html

Examples 4 and 5 should help.

[Reg_Slayer]

There is only 1 shareholder. Lets call him “B”. not “BECKER” not “BAKER”. just “B”.

25 beg basis =
+1 income
= 26 basis before distribution

26 of the distribution = reduces basis to 0.
+4 of distribution = TAXABLE CAPITAL GAIN [answer]

It is not until now that we look at the loss, and this was the tricky part.
Since our basis is 0, The $3 capital loss is suspended until there is more basis in the future.

[donnychristal]

This is VERY helpful! Thanks!

FAR - 75
AUD - 64/71
BEC - 85

[Author]

Replies