[H]

Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. 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 Baker?

Becker says it is $3000 and Ninja says it is $7000, What is the correct answer ?

[MrCPA511]

What was Becker's explanation for the $3000?

I would think the basis is $25000+1000-3000=23000.

Distribution in excess of basis = $7,000

FAR - 86 7/2014
AUD - 95 10/2014
REG - 87 1/22/15
BEC - 84 7/2015

[makiu]

@ H

Let's try this….

I would go with Ninja answer…..

Basis >>>>>>>>>>>>>>>>>>>25,000

+ordinary income>>>>>>>>>>>1,000

-separately reported items>>>>(3,000)

= adjusted basis>>>>>>>>>>>>23,000

less distribution>>>>>>>>>>>.(30,000)

=taxable distribution in excess

of basis………………………………….(7,000).

[Anonymous]

Hey guys, basic question, when we are making the adjustmens to the shareholder basis isn't there a specific order that we have to follow? Don't we have to consider first the SCorp income (including the tax exempt income) then the distributions, then the separatley stated items for losses and deductions and then the ordinary income of the S Corp? Or do we have to subtract first the distributions? Appreciate your input, thanks!

[mabancroft]

There are a couple of angles to approach this, but the correct answer is 4K.

Basis = 25K

Additions = 1K

Distributions = (30K)

Excess over basis = 4K

in the BASE formula, you have to subtract distributions before capital losses.

REG: 90
FAR: 76
AUD: 88
BEC: 89

[makiu]

@cortes123

Hey, hope that you are doing well. I love this question….force to read more… lol

Stock basis is adjusted in the following order: from Wiley Book

a. increased for all income items

b. decreased for distributions that are excluded from gross income

c. decreased for nondeductible, noncapital assets

d. decreased for deducible expenses and losses.

But, be careful when they asked for the treatment from S corporation distribution that is determined at the end of the S corporation tax year.

In a separate item, I saw earlier this post and is interesting to know how different authors have different point of view for he same question, but I stick with the code. Please see below Wiley response for this mc question.

” If a S corporation has no accumulated earnings and profits from C years, distributions to shareholders are generally nontaxable and reduce shareholders basis. To the extent that distributions exceed stock basis, they result in capital gain.

beg stock >>>>>>>>>>>$25,000

ordinary income >>>>>>$1,000

then cash distribution > $(30,000)

remaining >>>>>>>>>>$4,000 capital gain. Therefore he would not be able to deduct the LTCL of 3,000 this year because the cash distribution reduced his stock basis to zero.

[Anonymous]

Have him infuse some of that cash back into the s corp just on paper. Dr cash. Cr note payable. Give him some debt basis in case he has future losses. No money has to change hands. Defer note reypayment and interest. Got to tax plan for our clients people.

[H]

Thanks a lot guys. Didn't know about the order of adjustments.

[Author]

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