Question

Greiner, Inc., a calendar year S Corporation, holds no AEP. During the year, Chad, an individual Greiner shareholder, receives a cash distribution of $30,000 from the entity. Chad's basis in his stock is $25,000. Compute Chad's ordinary income and capital gain from the distribution. What is his stock basis after accounting for the payment?

Answer 1

Answer:

The long term capital gain= $30000-$25000

The long term capital gain= $5000

The basis in stock will be zero after the distribution.

Explanation:

Step 1 of 3

Tax treatment of amount distributed to shareholders:

The amount received as distribution to a shareholder under S Corporation is equal to the cash and fair market value of property distributed. The distribution is considered as tax-free to the limit that it does not exceed shareholder’s basis in the company’s stock. Any amount received in excess of basis will be treated as capital gain.

Step 2 of 3

However, taxation depends whether S Corporation has ever been a C Company or it posses’ accumulated earnings and profits. If it was never a C Corporation or doesn’t holds AEP then distribution equals to basis of share in S Corporation is a tax free gain for shareholder. Gain over and above basis is taxed as capital gains.

Step 3 of 3

In the given problem, C is a shareholder in S Corporation. He receives $30,000 as cash distribution. His basis in stock is $25,000. The distribution up to basis of stock is tax free distribution and above that is charged to capital gains. It is as follows-

Thus, capital gain of  is taxable in hands of C. His basis in S Corporation will reduced to zero as entire distribution is over and above basis of his stock.