Mark and pamela are equal partners in mp partnership.

their beginning balances and $150,000 each

Chapter 11 11-37

Determination of Pass Throughs and Stock Basis Adjustments

Mike and Nancy are equal shareholders in MN Corporation, and S corporation. The

corporation, Mike, and Nancy are calendar year taxpayers. The corporations has been

an S coproation during its entire existence and thus has no accumulated E&P. The

shareholders have no loans to the corporations. The corporations incurred the following

items in the current year:

Sales

$300,000

Cost of goods sold

140,000

Dividends on corporate investments

10,000

Tax exempt interst income

3,000

Section 1245 gain (recapture)on equipment sale

22,000

Section 1231 gain on equipment sale

12,000

Long-term captial gain on stock sale

8,000

Long – Term captial loss on stock sale

7,000

Short term captial loss on stock sale

6,000

Depreciation

18,000

Salary to Nancy

20,000

Meal and entertainment expenses

7,800

Interest expense on loans allocable:

Business debt

32,000

Stock investments

6,400

Tax-exempt bonds

1,800

Principal payment on busines loan

9,000

Charitable contributions

2,000

Distributions to shareholders ($15,000 each)

30,000

A) Compute the S coprotaiton’s ordinary income and separately stated items

B) Show Mike’s and Nancy’s shares of the items in Part A

C) Compute Mikes and Nancy’s ending stock bases assuming their beginning balances
are $100,000 each. When making basis adjustments, apply the adjustment in the
order outline on pages C:11-24 and C11-25 of the text COMPREHENSIVE PROBLEMS Ch 11:11-56 Comparison of Entity Formations. Cara, Bob, and Steve want to begin a business on January 1, 2009. The individuals are considering three business forms—C corporation, partnership, and S corporation. • Cara has investment land with a $36,000 adjusted basis and a $50,000 FMV that she is willing to contribute. The land has a rundown building on it having a $27,000 basis and a $15,000 FMV. Cara has never used the building nor rented it. She would like to get rid of the building. Because she needs cash, Cara will take out a $25,000 mortgage on the property before the formation of the new business and have the new business assume the debt. Cara obtains a 40% interest in the entity. • Bob will contribute machinery and equipment, which he purchased for his sole proprietorship in January 2004. He paid $100,000 for the equipment and has used the MACRS rules with a half-year convention on this seven-year recovery period property. He did not make a Sec. 179 expensing election for this property, and he elected not to take bonus depreciation. The FMV of the machinery and equipment is $39,000. Bob obtains a 39% interest in the entity. • Steve will contribute cash of $600 and services worth $20,400 for his interest in the business. The services he will contribute include drawing up the necessary legal documentation for the new business and setting up the initial books. Steve obtains a 21% interest in the entity. To begin operations, the new business plans to borrow $50,000 on a recourse basis from a local bank. Each owner will guarantee his or her ownership share of the debt. What are the tax and nontax consequences for the new business and its owners under each alternative? Assume that any corporation will have 200 shares of common stock authorized and issued. For the partnership alternative, each partner receives a capital, profits, and loss interest. How would your answer to the basic facts change if instead Steve contributes $2,600 in cash and $18,400 in services?

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