Problem - Determination of Pass-Throughs and Stock Basis Adjustments

Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike, and Nancy are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholders have no loans to the corporation. The corporation incurred the following items in the current year:

Sales $300,000

Cost of goods sold 140,000

Dividens on corporate investments 10,000

tax-exempt interest income 3,000

Section 1245 gain (recapture) on equipment sale 22,000

Section 1231 gain on equipment sale 12,000

Long-term capital gain on stock sale 8,000

Long-term capital loss on stock sale 7,000

Short-term capital loss on stock sale 6,000

Deprciation 18,000

Salary to Nancy 20,000

Meals and entertainment expenses 7,800

Interest expense on loans allocable:

Busines debt 32,000

Stock investments 6,400

Tax-exempt bonds 1,800

Principal payment on business loan 9,000

Charitable contributions 2,000

Distributions to shareholders ($15,000 each) 30,000

a. Compute the S corporation's ordinary income and separately stated items.

b. Show Mike's and Nancy's shares of the items in Part a.

c. Compute Mike's and Nancy's ending stock bases assuming their beginning balances are $100,000 each.