Question

XYZ CORP, AN S CORP WITH ONE SHAREHOLDER, SAM:

YEAR 1:

TAX-EXEMPT INCOME         $5,000

ORDINARY INCOME              30,000

YEAR 2:

ORDINARY LOSS                 ($40,000)

CASH DISTRIBUTIONS         15,000

BEGINNING OF YEAR 1:

XYZ HAS AAA AND OAA OF $0, AND ACCUMULATED E&P OF $6,000.

SAM HAS STOCK BASIS OF $10,000 AND DEBT BASIS OF $12,000 (ON LOAN TO XYZ).

QUESTIONS:

A. WHAT IS SAM’S REPORTABLE ITEMS FROM XYZ FOR YEARS 1 AND 2.

                        (FILL-IN) Items reported by the shareholder SAM:

Year 1:

Ordinary income                                             $

Tax-exempt income                                            

Year 2:

Ordinary loss allowed                                    

B. WHAT ARE BALANCES IN XYZ ACCOUNTS AND SAM’S STOCK AND DEBT BASES AT END OF EACH YEAR.

(use accounts discussed – rows/columns – balances)

C. WHAT IF DISTRIBUTION IN YEAR 2 IS $35,000 INSTEAD OF $15,000?

                      (FILL-IN)           Items reported by the shareholder:

Year 1:

Year 2:

Dividend income                                             $

Ordinary loss allowed                                    

Remaining loss carries over                           

(and - use accounts discussed – rows/columns – balances)

Answer 1

Answer to the question no A

Year 1:

Ordinary Income:              30000

Tax exempt Income:          5000

Year 2:

Ordinary Loss allowed:    40000

Answer to the question no B

                                                                                Stock      Debt

balance in the beginning of the year    10000 12000

Add: ordinary income                                               5000

Add: accumulated E&P                                            6000

Add: tax exempt income                               30000                 

balance at the end of 1st yr                                      51000       12000

less: cash distribution                                                15000         -     

                                                                         

balance 36000    12000       

less: Ordinary loss(40000/48000*36000)                     30000           10000

                                                                                                             

balance at the end    of 2nd yr                              6000               2000

                                                                            

Answer to the question no C

Items to be reported

YEAR 1 :

                                                  Ordinary income      tax exempt income

                                                        5000                     30000

Year 2                                        dividend Income          Ordinary loss allowed

                                                      6000                             21000

working note:

ordinary loss allowed= stock at the end of 1st yr-cash distribution

                                =51000-35000

                                 =21000

Loss to be carry over= loss-allowed in present yr

                              =40000-21000

                               =19000