Question

Adjusted Basis (LO. 3) Amos and Thomas form the Show Corporation during the current year. Amos owns 40% of Show's stock, Thomas owns 20%, and Arthur owns the remaining 40%. Amos paid $50,000 for his interest, and Thomas paid $25,000. Amos and Thomas are responsible for Show's daily operations and serve as co-chief executive officers. During the current year, Show Corporation has an operating income of $60,000 and pays out $10,000 in dividends. Assume that Show Corporation is organized as an S corporation. In its second year of operations, Show has an operating loss of $40,000 and pays out $20,000 in dividends. On December 31, Amos gives a 10% interest in Show (i.e., ¼ of his interest) to his son, Buddy.

At the end of the second year, Amos's adjusted basis is $____ and Buddy's adjusted basis is $____ in the Show stock.

Answer 1

Solution:

At the end of the second year, Amos's adjusted basis is $54,000 and Buddy's adjusted basis is $ 18,000 in the Show stock.

Workings:

First Year:

Description	Total	Arthur	Amos	Thomas
Share	100%	40%	40%	20%
Income	$60000
Dividend	$10000	$4000	$4000	$2000
Investment			$50000	$25000
Total			$54000	$27000

Second Year: Amos given up 1/4th of his share to

his son Buddy That means 40%X25% =10% share.

$54000 X 25%=$16,000, Then

Description	Total	Arthur	Amos	Buddy	Thomas
Share	100%	40%	30%	10%	20%
Loss	$40000
Opening Basis			$48000	$16000	$27000
Dividend	$20000	$8000	$6000	$2000	$4000
Closing Basis			$54000	$18000	$31000