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Question:

 

Tammy organized Sweet corporation in january of the current year and the coproation immedediatley

 

elected to be an S Corporation. Tammy who contributed 40,000 in cash to start the business owns 100

 

percent of the corporation's stock. Sweet's current years results are ordinary income $36,000 and short

 

term capital loss of $5,000. On July 10, Sweets makes a $10,000 cash distribution to Tammy.

 

a. What income do Sweets and Tammy recognize if any as a result of the distibution

 

Solution: Computation of the income do Sweets and Tammy recognize

 

Tammy is 100% owner of Sweet Corporation (an S Corporation).

 

Particulars

 

Amount

 

Ordinary income

 

$36,000

 

Net Income

 

$36,000

 

Short term capital loss

 

$5,000

 

b. What is Tammy's basis for the Sweets stock on December 31?

 

Solution; Computation of the Tammy's basis for the Sweets stock on December 31

 

Particulars

 

Amount

 

Cash contributed

 

$40,000

 

Add: Ordinary Income

 

$36,000

 

Less: Cash distribution

 

$(10,000)

 

Short term capital loss

 

$(5,000)

 

Adjusted basis on December 31

 

$61,000

 

Note:

 

Capital losses are not set off from ordinary income, the capital loss will be carried forward to next year.

 

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Solution details:

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DATE ANSWERED

May 23, 2022

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