[Anonymous]

Need help with this question….

Maui Corporation (an S corporation) reported a $72,000 ordinary loss during 2011. At the beginning of 2011, Elvis

and Frank equally owned all of Maui’s stock. On July 1, 2011, Frank gave one-fourth of his stock to his son, George.

What amount of the 2011 loss is allocated to George?

A. $4,537

B. $9,000

C. $0

D. $18,000

Answer (A) is correct. An S corporation shareholder includes his/her pro rata share of loss from the S

corporation [Sec. 1366(a)]. Sec. 1377(a) defines pro rata share as the taxpayer’s share of loss determined on a

per-day and then a per-share basis. Therefore, the amount of loss allocated to George is $4,537 ($72,000 ×

12.5% × 184 ÷ 365).

From what I’m reading and understanding, a shareholder’s holding period should NOT include the date of acquisition. Therefore, shouldn’t this question use 183 days for George (July 2 – Dec 31) and not 184, thus making his share of the loss $4,512??

Can someone clarify if there is a mistake in this question or whether I’ve lost my mind?

Thanks!

[Soproudofmyself]

I'm getting 184 days for George.

[Minimorty]

Okay, so I dont know if you are crazy or I am crazy, but this is how I do these:

total s-corp loss X %ownership X time period

$72,000 X 1/8 X 1/2 year = $4,500

Of the above answers which is $4,500 closest to? The answer is A.

I seriously think you are just spinning your wheels if you actually count the days. 99 times out of 100, the multiple choice answers will be far enough apart that you can easily select the most appropriate answer. You'll save yourself a ton of time too.

[Anonymous]

I'm spinning my wheels because God forbid this is a Simulation question, then I'll need to be exactly correct or will receive no credit.

[thechamp26]

You've totally lost your mind haha….

Try to think of it this way… the transfer of ownership is on July 1, 2011. Since George owns the stock on July 1, it only makes sense to have that day included in George's share of the S-Corps total income. The key is the income is allocated on a per-day basis. Since the stock transferred from Frank's hands to George's on July 1st, that day has to be allocated to George. It doesn't matter if the transfer took place at 1am on July 1 or 11pm on July 1, the key is it was transferred on July 1.

[Anonymous]

The Gleim book states that the day of acquisition does not count….

[Anonymous]

To prove my point, here's another question….

Ben and Jerry were the only shareholders of Water Ice, Inc., an S corporation. On January 1, 2011, Ben owned 40

shares and Jerry owned 60 shares. Ben sold his shares to Joe for $10,000 on March 31, 2011. The corporation reported

a $50,000 loss at the end of 2011. How much of the loss is allocated to Joe?

A. $12,500

B. $10,000

C. $20,000

D. $15,068

Answer (D) is correct. An S corporation shareholder includes his/her pro rata share of loss from the S

corporation [Sec. 1366(a)]. Sec. 1377(a) defines pro rata share as the taxpayer’s share of loss determined on a

per-day and then a per-share basis. Since Joe bought Ben’s shares on March 31, 2011, his per-day basis is 275.

The loss must be allocated based on the number of days Joe was a shareholder ($50,000 × 40% × 275 ÷ 365 =

$15,068). In addition to the required amount allocated, a shareholder’s loss is limited to his/her adjusted basis

in the stock of the corporation plus his/her adjusted basis in any indebtedness of the corporation owed to the

shareholder. Since the corporation owes Joe no debts, his loss is limited to his basis in the stock.

Joe acquired the shares on March 31, but his holding period begins on April 1. April 1 – Dec 31 = 275 days. So, this answer makes sense. We did not include March 31st. So, why, on my first question, is the day of acquisition counted while on this question, it's not???

[Anonymous]

Another question (and this one is a question that was actually released by the AICPA)…

As of January 1, 2011, Kane owned all the 100 issued shares of Manning Corp., a calendar-year S corporation. On the

41st day of 2011, Kane sold 25 of the Manning shares to Rodgers. For the year ended December 31, 2011 (a 365-day

calendar year), Manning had $73,000 in nonseparately stated income and made no distributions to its shareholders.

What amount of nonseparately stated income from Manning should be reported on Kane’s 2011 tax return?

A. $56,800

B. $0

C. $16,250

D. $54,750

Answer (A) is correct. Each shareholder shall include in gross income the pro rata share of the S corporation’s

income. The pro rata share is the taxpayer’s share of the corporation’s income after assigning an equal portion

of the income to each day of the taxable year and then dividing that portion pro rata among the shares

outstanding on each day. Therefore, each day of the year will be assigned $200 of income ($73,000 ÷ 365).

Kane’s share will be $56,800 [$8,200 (41 days × $200 × 100% ownership) plus $48,600 (324 days × $200 ×

75% ownership)].

In this case, the 41st day (the day of disposition) is included in Kane's holding period and is not included in Rodgers' holding period. So, in these last 2 questions I've posted, the holding period begun on the day AFTER acquisition and ended on the day of disposition. But on the very first question I posted, the holding period begun ON the acquisition date. See where I'm confused?

[Minimorty]

@CPAMan – i know you really want to get this right, but you have spent more time on this concept than I spent on any of the concepts in any of the sections. You know enough about it, I really suggest you move on. Focus on areas that you are having more difficulties with.

[thechamp26]

CPAMan those questions you just posted are similar but not the same as the first.

The first question specifically says the stock was given by Frank to his son. So the first question is just a transfer of ownership from father to son as a gift. The stock was a gift, so there is no “acquisition” here. This question is just a transfer of ownership.

The two other questions relate to sales to unrelated parties. The difference is gain/loss is recognized (presumably) in these transactions by the seller. The seller's basis in the stock includes any activity from the beginning of the year to (and including) the day of sale. Since the income/loss on the transaction date is included in the seller's basis when they calculate their gain/loss on the sale on their personal tax return, you'd be double counting the income if the buyer included it in his basis, too.

So again, your Gleim book is right because the last two questions you posted were related to acquisitions of stock (resulting in a gain/loss) but the first question you posted was just a transfer of stock (a gift) from father to son.

[jdj017400]

@CPAMan

In response to your question released by the AICPA:

That is really strange, because I just got done working the EXACT same question on a Becker (2011) quiz. However, the answer choices were:

a. $56,750

b. $54,750

c. $16,250

d. $0

Becker explanation:

Choice “a” is correct. The mid-year change of ownership causes Manning's S corporation income to be allocated between the shareholders on a per-share, per-day basis. The first 40 days' income is allocated 100% to Kane: 40 x ($73,000/365) = $8000. 75% of the remaining 325 days' income is allocated to Kane: 75% x 325 x ($73,000/365) = $48,750. The total income allocated to Kane is $56,750, ($8000 + $48,750).

So now I really don't know what to think. And @Minimorty, I understand this is a trivial item to focus on, however, CPAMan makes a good point in respect to something like this being on a simulation…

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[Anonymous]

Thanks, thechamp!

[jdj017400]

@thechamp

As a follow up to my last post about the exact same question:

-So is Becker incorrect by not including day 41?

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[thechamp26]

@jdj017400

Technically, the “correct” answer would be found in the stock purchase agreement or whatever. Usually what I see in practice (I know it's not the same situation) with corporate stock acquisitions is a transaction would take place on 12/31 but the “new” entity would begin on 1/1.

This is what makes tax challenging. Nothing is ever clear in the tax code so tax payers & professionals have to make judgment calls to determine the tax treatment of different scenarios.

With regards to Becker's question… given the answer choices, that answer is definitely the most correct.

[Anonymous]

Wow! All I know is that I will be so screwed if I get a Simulation on this. But in my Gleim book, it's written in stone that the date of acquisition doesn't count. So, in the event that I do get a Simulation, I will be doing just that….

REG is ridiculous! No matter how hard one tries, you can't get this down perfectly. Frustrating!

[jdj017400]

Thanks thechamp.

Yea hopefully something that detailed wont show up on a simulation.

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[Author]

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