Resolved Question:
1. XYZ has been an S corporation since its inception six years ago. On January 1 of the current year, the corporation’s two equal shareholders, John and Jane, had adjusted bases of $150,000 and $175,000, respectively, for their S corporation’s stock. The shareholders plan to have the corporation distribute land with a $50,000 adjusted basis and a $200,000 FMV in the current year. Ordinary income is expected to be $180,000 in the current year. What tax issues should John and Jane consider with respect to the distribution?
2. Zap Corporation has always been an S corporation and is 100% owned by David. David has a basis of $40,000 in his Zap stock at the beginning of the year. During the year, Zap has an ordinary loss of $20,000 and a long-term capital gain of $10,000. In addition, Zap Corporation distributed $55,000 in cash to David on December 1. Will the distribution cause David to recognize a gain? If so, what are its amount and character?
3. An S corporation, reports the following results for the current year:
Ordinary income $70,000
Long-term capital gain $20,000
Municipal bond interest income $10,000
Domestic corporate dividends $6,000
Charitable contributions $16,000
The corporation AAA and accumulated E&P balances at the beginning of the year are $80,000 and $50,000, respectively. The corporation makes a $100,000 cash distribution to its sole shareholder on June 1 and a second $100,000 cash distribution on December 1. The shareholder’s basis for the S Corp stock on January 1 was $120,000. Discuss the tax consequences of these transactions.
