[Anonymous]

Beech Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. At the beginning of the current year, Gold owned 50% of the 100 issued shares of Beech stock, and had a $3,000 tax basis in the Beech stock. During the current year, Beech had $200,000 in net business income and $4,000 in Oak County municipal bond interest income. Beech made no distributions to its shareholders. What was Gold’s tax basis in Beech stock at year end?

Answer is 105,000, which includes the tax-exempt interest income in the shareholder’s tax basis. My question is why do we include a tax-exempt item in the tax basis of a shareholder? I mean if the question stated “shareholder’s basis” rather than “shareholder’s tax basis” I would agree because the book provides that we should include tax-free income in calculating the ending basis BUT NOT the tax basis.

Could that mean that S corp tax basis = S corp basis for the shareholder?

I feel like something is going over my head here. Please help. Thank you.

[Anonymous]

A shareholder's tax basis is their outside basis in the S Corp. Nontaxable income & n/d expenses are included in calculating a s/h tax basis. I don't know of any basis calculation (inside or outside) that doesn't include these items. The only thing I can think of is that they are not included in the taxable income or loss allocated to the shareholder.

[Anonymous]

@BoutTime4CPA

Thank you.. I think I will have to see what the inside & outside basis are…

[Anonymous]

In my experience in practice, they are usually the same. Differences can be caused by things like capital account going below 0 on company books, but on the individual's return, a gain was recognized for distributions in excess of basis, bringing outside basis back to 0. Just an example.

[Anonymous]

@ BoutTime4CPA

Thanks for the example. I envy you for the tax experience you have. Everything that I'm studying here is theoretical to me. Yeah, Tim mentioned how the basis can go below -0- when the liabilities assumed by the corporation exceed the adjusted basis of the property transferred; however, the gain recognized by the transferor will bring up the stock basis to -0-.

[Author]

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