[Anonymous]

Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:

Accumulated adjustments account $ 8,000

Accumulated earnings and profits 10,000

Paul’s stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What is Paul’s stock basis at the end of the year?

A. $1,000

B. $2,000

Correct C. $11,000

D. $12,000

Paul’s basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul’s basis ($20,000 – $8,000 – $1,000 = $11,000).

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I got the answer to this question right, but I am just wondering, where did the 1000 come from? The way I see it, out of the 19,000, 10,000 is ordinary dividend income (because up to accumulated earnings and income which is 10,000), and the remaining 9000 reduces the basis. Why does the explanation have 8000 and 1000 instead of just 9000?

[Anonymous]

Anyone?

[Kimboroni]

I don't have any extra info to help with their explanation, but they say “The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul's basis” — so that's the distribution of $19K minus the $18K equals the mystery $1K.

Add that to the $8K from the accumulated adjustments account, and that's the $9K that reduces his basis.

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[Anonymous]

The $1000 is the remaining part of the $19,000 distribution after subtracting the balances from:

AAA of $8,000 (which represents cumulative S Corp income–not taxable and reduces basis)

AEP of $10,00 (which represents cumulative C Corp

income–taxed like a C Corp dividend; do not reduce basis)

So the last $1,000 is a return of capital (not taxed, does reduce basis.)

$20,000 – 8,000 – 1,000 = $11,000

[needhelpnow]

I am confused..does this mean that when the question says for example AAA is $100, and the basis is $1000. Does that mean that the AAA ($100) is part of the basis?

[Author]

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