Question

A, B and C, all individuals, own, respectively, 25%, 20% and 55% of X Corp. Their bases in their stock interests are $2,500, $200, and $4,000, respectively. X has the following items of tax significance for the current year: gross profits, $20,000; depreciation, $8,000; interest expense, $2,000; charitable contributions, $500; long-term capital gain, $5,000. 

(a) How do these results effect the individual tax returns of A, B and C?

(b) Suppose that A had bought her interest from another individual D on January 30. How would this change your answer?

(c) Assume the same facts as (a) except that the gross profit was only $2,000. How would this change your answer?

(d) Same as (c) except that X owes B $500. Would this change your answer?

(e) Refer back to the facts of 3(c). What bases do A, B and C have at yearend?

(f) In question 3(d), what bases do A, B and C have at yearend?

(g) Same as (f) except that in the following year X has income of $10,000. What basis does B have at the end of this following year?

Answer 1

(a) ANSWER 

A’s share of gross profits, depreciation and charitable contributions is $5,000, $2,000 and $125, respectively. B’s share of these items is $4,000, $1,600 and $100, respectively. C’s share of these items is $11,000, $4,400 and $275, respectively.

 

(b) ANSWER 

A’s share of gross profits, depreciation and charitable contributions is $5,000, $2,000 and $125, respectively. B’s share of these items is $4,000, $1,600 and $100, respectively. C’s share of these items is $11,000, $4,400 and $275, respectively. D’s share of these items is $0, $0 and $0, respectively.

 

(c) ANSWER 

A’s share of gross profits, depreciation and charitable contributions is $500, $200 and $125, respectively. B’s share of these items is $400, $160 and $100, respectively. C’s share of these items is $1,100, $440 and $275, respectively.

 

(d) ANSWER 

 

A’s share of gross profits, depreciation and charitable contributions is $500, $200 and $125, respectively. B’s share of these items is $0, $0 and $0, respectively. C’s share of these items is $1,100, $440 and $275, respectively.

 

 

(e) ANSWER 

A has a basis of $2,700 in her stock interest. B has a basis of $2,600 in his stock interest. C has a basis of $4,500 in his stock interest.

 

(f) ANSWER 

A has a basis of $2,700 in her stock interest. B has a basis of $500 in his stock interest. C has a basis of $4,500 in his stock interest.

 

 

(g) ANSWER 

B has a basis of $1,000 in his stock interest. 

 

WORKING 

A’s share of gross profits, depreciation and charitable contributions is $5,000, $2,000 and $125, respectively. B’s share of these items is $0, $0 and $0, respectively. C’s share of these items is $11,000, $4,400 and $275, respectively.