Answer:
The person ‘J’ basis in the stock is $0.
The person ‘J’ basis in his debt is $0.
The capital gain arises as result of distribution is $5,000
Explanation:
J’ share of net income is $10,000 and the distribution of cash to person ‘J’ is $15,000, therefore, the person ‘J’ basis in his stock is first increased by $10,000 and then decreased by $15,000 but it cannot be negative, hence the person ‘J’ basis in his stock is reduced to $0.
During the current year the person ‘J’ share in taxable income is $10,000, hence there is no loss, So the shareholders ‘J’ basis on debt remains $0 or when the company starts making money again, the basis of loan will automatically increase.
The person ‘J’ basis in his debt is $0.
The capital gain on distribution of cash is calculated as follows;
Capital Gain = Cash Distribution - J's basis in is stock
=$15,000 - $10,000
=$5,000
Therefore, the capital gain on distribution of cash is $5,000.
