Question

2. The S corporation election, once made, can be terminated. How? Discuss how an S election might terminate.

3. Dana owns a one-third capital and profits interest in the Spendalot Partners partnership. The partnership uses the calendar year. Her partnership interest had a basis to her of $240,000. This year, the partnership distributes the following assets to Dana:   (1) cash of $280,000; and (2) stocks held for investment, having a basis of $60,000 to the partnership, and a fair market value of $120,000.    

       

(a) What is Dana’s recognized gain or loss on the distribution?

(b) What basis does she take in the stock?   

(c) What is her basis in her partnership interest after the distribution

Answer 1

I have only answered the 3 question.

Sol.2)

• S election once made can be terminated by the revocation.
• Shareholder's who has more than one half share of the company must consent to revocation.
• If the corporation ceases to be a small corporation and want to expand its operation.
• When investment income exceeds 25% of gross receipt for three consecutive years.
• Accumulated profit and earnings for three consecutive years.

Sol. 3) The recognized gain is calculated by deducting the partnership basis from the distributed cash amount.

  

b) $60,000 is the stock held in investment and when the investment is distributed, the lesser of carryover basis of $60,000 or dana remaining basis of $0. The $0 will be basis she will take in the stock after the cash distribution.

c) $0 will be her basis in partnership interest after the cash distribution.

Recognized Gain = Distributed Cash Amount - Partnership Basis

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