Question

1. Lena Tucker contributed $20,000 in cash and land with an adjusted basis of $100,000 and a fair market value of $140,000 to a newly formed corporation in return for 1,000 shares of stock in the corporation. During Year 1, Lena's pro rata share of the corporation's separately and nonseparately stated items of income was $40,000 (including $5,000 of tax-exempt interest), and her pro rata share of the corporation's separately stated items of loss and deductions was $80,000. During the year she received distributions totaling $30,000. What is her adjusted basis in the 1,000 shares of stock?
2. Same facts as in the previous problem. In Year 2, Lena's pro rata share of income is $30,000, and her pro rata share of separately stated items of loss and deductions is $70,000. She received distributions totaling $25,000 during the year. What amount of separately stated losses and deductions may Lena deduct for the year? What would happen if Lena loans the company $20,000 during the year?

Answer 1

Adjusted basis is a concept driven by the IRS code, which requires a tax payer to calculate the adjusted cost of assets for the purposes of tax accounting and declaration of accurate income for the purposes of tax payments.

In general terms, adjusted cost can be understood as a mechanism to calculate the as on date value of assets considering initial investment or purchase cost ( including all other ancillary cost such as brokerage, commission,etc) investment post acquisition, depreciation or amortization and any other monitory event increasing or decreasing the value of assets.

For calculating adjusted cost, following formula is considered :

1. Purchase Cost

2. Add: Re-investments

3. Less: Depreciation or Amortisation

4. Adjusted Cost = 1+2-3

Considering the above concept, adjusted cost of shares for Lena shall be as below:

1. Purchase cost of shares = cash payment of $20,000 + Adjusted cost of land of $ 100,000 = $120,000

2. Appreciation = Lena's pro rata share of the corporation's separately and non separately stated items of income was $40,000

3. Depreciation = Pro rata share of the corporation's separately stated items of loss and deductions was $80,000+ Distributions totalling $30,000 = $110,000

Adjusted Cost of Stock = 1+2-3

= $120,000+$40,000-$110,000 = $ 50,000

Lena's basis in her shares has to be adjusted as follows :

Beginning Basis : $50,000

Plus: Pro rata share of income : $30,000

Minus : Distributions ($25,000)

Less : Pro rata share of separately stated items of loss and deductions ($70,000)

Answer : $0