Answer:
A.Amos’s basis is $50,000
and Thomas’s is $25,000
B.Adjusted basis - End of year $ 70,000 $ 35,000
Explanation:
A.Show Corporation as a corporation.
Show Corporation is a separate taxable entity. The $60,000 operating income is taxed using the corporate tax rate schedule.
The Show corporation’s tax liability is $10,000 [$7,500 + ($60,000 - $50,000
= $10,000 x 25%)].
Amos reports $4,000 ($10,000 x 40%) and
Thomas reports $2,000 ($10,000 x 20%) of dividend income.
Therefore neither the taxable income reported by Show nor the dividends paid affects a shareholder’s basis.
Amos’s basis is $50,000
and Thomas’s is $25,000.
b. Show Corporation as an S corporation.
Amos and Thomas's basis at the end of the current year :
Amos Thomas
Original investment - At cost $ 50,000 $ 25,000
Add: Additional investment
Share of income Amos $60,000 x 40% 24,000
Thomas $60,000 x 20% 12,000
Less: Recoveries of capital
Dividends received (4,000) (2,000)
Adjusted basis - End of year $ 70,000 $ 35,000
