1 / 22

Problems 2 and 3 Beginning on Page 435

Problems 2 and 3 Beginning on Page 435. Pg 435 Problem 2(a). Without regard to the distribution, Nancy and Opal each include $2,000 of LTCG (4,000 ÷ 2) and $3,000 ((32,000 – 18,000 – 8,000) ÷ 2)) of ordinary income. Nancy’s pre-distribution stock basis is $6,000 ($1,000 + 2,000 + 3,000).

tahir
Download Presentation

Problems 2 and 3 Beginning on Page 435

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Problems 2 and 3Beginning onPage 435

  2. Pg 435 Problem 2(a) • Without regard to the distribution, Nancy and Opal each include $2,000 of LTCG (4,000 ÷ 2) and $3,000 ((32,000 – 18,000 – 8,000) ÷ 2)) of ordinary income. • Nancy’s pre-distribution stock basis is $6,000 ($1,000 + 2,000 + 3,000). • Opal’s pre-distribution stock basis is $10,000 ($5,000 + 2,000 + 3,000).

  3. Pg 435 Problem 2(a) • P Corp’s pre-distribution AAA account is $10,000 (note AAA begins at zero (a new S election) and is increased by the LTCG of $4,000 and ordinary income of $6,000). • Because the $10,000 distribution does not exceed the AAA account (rather it matches the pre-distribution AAA account), no C Corp e&p is distributed (no dividend to the shareholders).

  4. Pg 435 Problem 2(a) -- Sec 1368 • Impact of distribution on Nancy: No gain. • Nancy’s pre-distribution stock basis $6,000 • Distribution of AAA < 5,000> • Nancy’s Ending Stock Basis 1,000 • Impact of distribution on Opal: No gain. • Opal’s pre-distribution stock basis $10,000 • Distribution of AAA < 5,000> • Opal’s Ending Stock Basis 5,000 Year end AAA is zero

  5. Pg 435 Problem 2(b) • P Corp’s pre-distribution AAA account is still $10,000. • Because the $20,000 distribution exceeds the AAA account by $10,000, $6,000 of that excess is a dividend (C Corp e&p of $6,000 is a given).

  6. Pg 435 Problem 2(b) -- Sec 1368 • The $10,000 distribution to Nancy (recall thatNancy’s pre-distribution stock basis is $6,000) • $5,000 from AAA (basis recovery)-§1368(c)(1), (b)(1) • $3,000 is a dividend--§1368(c)(2) • $1,000 is a basis recovery - §1368(c)(3), (b)(1) • $1,000 is LTCG--§1368(c)(3), (b)(2) Nancy’s year end stock basis is zero ($6,000 – 5,000 (from AAA) – 1,000). Note, the $1,000 §1368(c)(3), (b)(2) LTCG will NOT appear on Schedule K-1. The K-1, line 16d will include the distribution of $7,000 to Nancy and the dividend of $3,000 would appear on Nancy’s Form 1099.

  7. Pg 435 Problem 2(b) -- Sec 1368 • The $10,000 distribution to Opal (recall thatOpal’s pre-distribution stock basis is $10,000) • $5,000 from AAA (basis recovery)-§1368(c)(1), (b)(1) • $3,000 is a dividend--§1368(c)(2) • $2,000 is a basis recovery - §1368(c)(3), (b)(1) Opal’s year end stock basis is $3,000 ($10,000 – 5,000 (from AAA) – 2,000). Schedule K-1 will include the distribution of $7,000 to Opal on line 16d and Opal’s Form 1099 will show a dividend of $3,000.

  8. Pg 435 Problem 2(b) -- Sec 1368 • AAA is zero at year end ($10,000 – 10,000). • AAA can be negative from net losses but not from distributions. • Year end C corp e&p is also zero $6,000 - $6,000) because all $6,000 was distributed (a dividend).

  9. Pg 435 Problem 2(c) • Without regard to the distribution, Nancy and Opal each include $2,000 of LTCG (4,000 ÷ 2) and $3,000 ((32,000 – 18,000 – 8,000) ÷ 2)) of ordinary income. • Nancy’s pre-distribution stock basis is $8,000 ($1,000 + 2,000 + 3,000 + 2,000 (tax exempt inc)). • Opal’s pre-distribution stock basis is $12,000 ($5,000 + 2,000 + 3,000 + 2,000 (tax exempt inc)).

  10. Pg 435 Problem 2(c) • P Corp’s pre-distribution AAA account is $10,000 (note AAA begins at zero (a new S election) and is increased by the LTCG of $4,000 and ordinary income of $6,000 but is not increased by tax exempt income). • Because the $14,000 distribution exceeds AAA account by $4,000, all $4,000 is a dividend. • This is the tax exempt income trap if the S Corp has C corp e&p.

  11. Pg 435 Problem 2(c) -- Sec 1368 • The $7,000 distribution to Nancy (recall thatNancy’s pre-distribution stock basis is $8,000) • $5,000 from AAA (basis recovery)-§1368(c)(1), (b)(1) • $2,000 is a dividend--§1368(c)(2) Nancy’s year end stock basis is 3,000 ($8,000 – 5,000 (from AAA)). The K-1, line 16d would include the distribution of $5,000 to Nancy and the dividend of $2,000 would appear on Nancy’s Form 1099

  12. Pg 435 Problem 2(c) -- Sec 1368 • The $7,000 distribution to Opal (recall thatOpal’s pre-distribution stock basis is $12,000) • $5,000 from AAA (basis recovery)-§1368(c)(1), (b)(1) • $2,000 is a dividend--§1368(c)(2) Opal’s year end stock basis is $7,000 ($12,000 – 5,000 (from AAA)). Schedule K-1 will include a distribution of $5,000 to Opal on line 16d and Opal’s Form 1099 will show a dividend of $2,000.

  13. Pg 435 Problem 2(c) -- Sec 1368 • AAA is zero at year end ($10,000 – 10,000). • C corp e&p at year end is $2,000 $6,000 - $4,000) because $4,000 was distributed (a dividend).

  14. Pg 435 Problem 2(d) -- Sec 1368 • The issue here is the extent to which AAA carries over to a transferee (Rose here) in year 2. • AAA does transfer to a transferee of stock (unlike old PTI).

  15. Pg 435 Problem 2(d) – Year 1 • In year 1, Nancy and Opal each include $2,000 of LTCG (4,000 ÷ 2) and $3,000 ((32,000 – 18,000 – 8,000) ÷ 2)) of ordinary income. • Nancy’s year end stock basis is $6,000 ($1,000 + 2,000 + 3,000). • Opal’s year end stock basis is $10,000 ($5,000 + 2,000 + 3,000). • P Corp’s year end AAA account is $10,000 • P Corp’s C corp e&p at year end is $6,000

  16. Pg 435 Problem 2(d) – Year 2 • Nancy sells her stock to Rose for $6,000 on January 1 of year 2 and recognizes zero gain on the sale ($6,000 sales price - $6,000 stock basis). • Rose’s beginning stock basis is $6,000 (cost).

  17. Pg 435 Problem 2(d) – Year 2 • When the $6,000 is distributed to Rose: • $5,000 will come from AAA (income previously reported by Nancy) and be a tax free recovery of basis to Rose. • $1,000 is a dividend to Rose (her share of C Corp e&p.) Rose’s ending stock basis is $1,000 ($6,000 - $5,000).

  18. Pg 435 Problem 2(e) -- Sec 1368 • The issue here is the post-termination transition period (defined in Sec 1377(b)) following the revocation of the S election effective January 1 of year 2. • Note, the S corp becomes a C corp (subject to double tax on earnings) January 1 of year 2.

  19. Pg 435 Problem 2(e) – Year 1 (S corp) • In year 1, Nancy and Opal each include $2,000 of LTCG (4,000 ÷ 2) and $3,000 ((32,000 – 18,000 – 8,000) ÷ 2)) of ordinary income. • Nancy’s year end stock basis is $6,000 ($1,000 + 2,000 + 3,000). • Opal’s year end stock basis is $10,000 ($5,000 + 2,000 + 3,000). • P Corp’s year end AAA account is $10,000 • P Corp’s C corp e&p at year end is $6,000

  20. Pg 435 Problem 2(e) – Year 2 • In year 2, P (now a C corp) has $5,000 of year 2 e&p (in addition to the old C corp e&p of $6,000) and distributes $7,000 each, to Nancy and Opal • Section 1371(e)(1) provides that cash distributions during a post-termination transition period are treated as a recovery of stock basis to the extent the distribution does not exceed the AAA.

  21. Pg 435 Problem 2(e) – Year 2 • For both Nancy and Opal (each receive $7,000 cash), $5,000 of the distribution (share of AAA) is a tax free basis reduction and the other $2,000 is a dividend per Code Sec 301(c)(1). • Notice that during the post-termination transition period even an S corp without any prior (pre-S election) C corp e&p needs to determine AAA for purposes of C corp e&p earned during that (post-S election) post-termination transition period.

  22. Pg 436 Problem 3 • We will discuss this issue in depth after we finish discussing S corporations. • For distributions of cash, the rules are similar for partners. • In general, with a partnership distribution of appreciated property, distributions do not trigger gain (Sec 311(b) does not apply to partnerships). A partner typically takes the same basis that the partnership had in the property. • Code Sec. 751 (applicable only to partnerships) is a complicated exception for partnerships.

More Related