Question 1) ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2016, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation Conner, Inc. ABC reported business income for 2016 as follows (assume that there are 365 days in the year):
| Period |
Income |
| January 1 through April 30 (120 days) |
$200,000 |
| May 1 through December 31 (245 days) |
530,000 |
| January 1 through December 31 |
$730,000 |
If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?
Question 2.) XYZ Corporation (an S corporation) is owned by Jane and Rebecca who are each 50% shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2016.
| Description |
Amount |
| Sales revenue |
$730,000 |
| Cost of goods sold |
(200,000 |
| Long-term capital gain |
8,000 |
| Dividend income |
5,000 |
| Tax exempt interest |
3,000 |
| Salary to owners |
(120,000 |
| Employee wages |
(50,000 |
| Description expenses |
(12,000 |
| Miscellaneous expenses |
(10,000 |
| Overall net income |
$ 354,000 |
Required:
a. What amount of ordinary business income is allocated to Jane?
b. What is the amount and character of separately stated items allocated to Jane?
c. What is Jane's basis in her XYZ corp. stock at the end of the year?
Question 3) Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2016, Parker's basis in his Johnson Corp. stock was $14,000. During 2016, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2017, Johnson Corp. reported $8,000 of ordinary business income.
a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2016?
b. What is Parker's stock and debt basis at the end of 2016?
c. What is Parker's stock and debt basis at the end of 2017?