Question

During the year, Gary, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. At the end of last year, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?a. Gary recognizes a $1,000 LTCG.b. Gary’s stock basis is $2,000.c. Gary’s ordinary income is $15,000.d. Gary’s tax-free return of capital is $11,000.

Answer 1

Answer: a. Gary recognizes a $1,000 LTCG

Explanation:

Long Term Capital Gain is calculated by the formula:

= Distribution from company - Basis in stock - Ordinary income earned during the year

= 16,000 - 4,000 - 11,000

= $1,000

First statement is therefore correct that Gary would recognize an LTCG of $1,000.