Question

Austin owns 100% of the stock of MoJo Corp., which is a calendar year S corporation. MoJo has been an S corp for 12 years, but was a C corp prior to that. At the beginning of 20x1, MoJo has an Accumulated Adjustments Account of $200,000 and Accumulated Earnings and Profits from C-Corp years of $500,000. Austin has a stock basis of $300,000 on January 1, 20x1. MoJo has income of $0 in 20x1 ignoring any effect of distributions. MoJo distributes Evilacre, a plot of land held as an investment, to Austin during 20x1. MoJo has a basis of $600,000 in Evilacre and Evilacre has a fair market value of $800,000 on the date of distribution. What is Austin’s taxable income from these events (including any K1 income passing through to Austin)?

A. $200,000 capital gain; $400,000 dividend

B. $200,000 capital gain; $500,000 dividend

C. $500,000 dividend only

D. $500,000 capital gain only

E. None of the above answers are correct

Answer 1

Answer : B. $200,000 capital gain; $500,000 dividend

Note:

1. Calculation of Capital Gain

Mojo’s basis in Evilace is $600,000

Fair market on the date of distribution is $800,000

· Capital Gain = Fair Market Value – Basis

                   = 800,000 – 600,000

                   = 200,000

The plot of land Evilace held as an investment in Austin during 20x1 and Mojo is an S corporation during that period. Therefore no tax effect is going too held. Austin is eligible for total part of the Capital Gain. ie. $ 200,000.

2. Dividend

Austin has a basis on Mojo as on January 1, 20x1 (Mojo as a S Corporation) $ 300,000 and Mojo’s accumulated adjustment account is $ 200,000.

As per the problem mentioned Austin owns 100% of the stock of MoJo Corp as an S Corporation, same have balance from C corporation $500,000