Question

At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $15,600 and accumulated E&P of $20,750 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $20,750 distribution (the remaining shareholders received $31,125 in distributions). (Assume her stock basis is $41,500 after considering her share of Bombay’s income for the year but before considering the effects of the distribution.) Required: What is the amount and character of gain Nicolette must recognize from the distribution? What is her basis in her Bombay stock at the end of the year?

Answer 1

What is the amount and character of gain Nicolette must recognize from the distribution?

Dividend	8,300
Return on Capital	12,450

What is her basis in her Bombay stock at the end of the year?

Basis

29,050

Calculation

	Description	Amount	Calculation
(a)	Total Distribution	20,750
(b)	Bombay Accumulated Adjusted Account beginning balance	15,600
(c)	Distribution from Accumulated Adjusted Account	15,600	Lesser of (a) or (b)
(d)	Prop in excess of Accumulated Adjusted Account	20,750
(e)	Nicolettes Share Basis	6,240	(c) x 40% nontaxable
(f)	Nicolettes Beginning Stock	41,500
(g)	Nicolettes Reduced Basis	35,260	(f) – (e)
(h)	Bombay E&P	20,750
(i)	Dividend distribution E&P	20,750
(j)	Nicolette’s share dividend	8,300	(h) x 40%
(k)	Nicolettes Share Basis	6,210	(h) – (e) – (j)
(l)	Nicolettes ending Basis	29,050	(g) – (k)

Return on Capital = 20,750 - 8,300 = 12,450

Note:

(g). Nicole is not taxed on the first $6,240 of the distribution as Nicole's proportionate share is $6,240.

(j). Nicole's proportionate share is $8,300. So, the next $8,300 of the distribution is a dividend to Nicole and that would not reduce the stock basis.