Luna owns 80% of Good stock (S-corporation) throughout the year. Luna’s beginning of the year stock...

Luna owns 80% of Good stock (S-corporation) throughout the year. Luna’s beginning of the year stock basis is $25,000. Luna has an additional stock purchase (investment) this year of $15,000. Luna loans the Corporation $150,000 this year. Good Corporation has beginning AAA of $163,000. Good Corporation’s Form 1120S shows the following information.

Sales 600,000

Long Term Capital Loss 6,000

Cost of Goods Sold 350,000

Tax Exempt Interest Income 5,000

Charitable contribution 60,000

Distribution to Luna 40,000

What is Luna’s end of the year stock basis?
What is Good Corporation’s end of the year AAA balance?

Expert Solution

Answer

a. Luna end of the year stock basis

Luna's beginning of the year stock basis	$ 25,000
Add: Additional stock purchase this year	$ 15,000
80% of ordinary income(600000-350000)*80% ( WN)	$ 2,00,000
Tax exempt interest income (80%)	$ 4,000
Less: Charitable contribution (80%)	$ -48,000
Long term capital loss (80%)	$ -4,800
Lisa's end of the year stock basis	$ 1,91,200

Luna's debt basis
Luna loan the corporation this year	$ 1,50,000

Working note:
Ordinary income
Sales	$ 6,00,000
Less: Cost of goods sold	$ 3,50,000
Ordinary income	$ 2,50,000
80% of ordinary income	$ 2,00,000

b. Good Corporation's end of the year AAA balance

Beginning AAA balance	$ 1,63,000
Add: Ordinary income	$ 2,00,000
Less: Long term capital loss	$ -5,000
Ending AAA balance	$ 3,68,000

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