Joe and Sunny intend to enter into a business venture together and decided that an S...

Joe and Sunny intend to enter into a business venture together and decided that an S corporation would be a desirable entity choice for federal income tax purposes. The corporation is named Michigan Inc. (“MII”). For newly established MII, Joe intends to contribute Property A with fair market value (“FMV”) of $800 and basis of $300. Sunny intends to contribute cash of $800. Joe and Sunny are equal owners of MII.

Question: Assume at the end of Year 1, MII had no operating income/loss. MII would like to distribute cash to Joe and Sunny and distribute Property A only to Joe. Will this arrangement work? Why? If yes, provide Joe’s and Sunny’s basis in MII at the end of Year 1.

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Ans:

Yes, this arrangement will work.

Joe and Sunny's each would have a basis of zero ($0) at the end of year 1, if the cash and property are distributed.

Explanation:

Yes, this arrangement will work.If MII did not have any operating income or loss, they can still distribute cash to Joe and Sunny and property A to Joe only. This would be based on the adjustment or changes to the property value. The net cash available would be distributed to Joe and Sunny but the remaining value of the property adjusted for cash distributions, would be given to Joe.

Joe and Sunny's each would have a basis of zero ($0) at the end of year 1, if the cash and property are distributed without any income realized.

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ekkarill92 answered 1 year ago

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