Question

Two years ago, Advantage Appliance, Inc., an S corporation, purchased a plot of investment land for $208,000. This year, Advantage Appliance distributed the land, now worth $377,000, to Phillipa, its majority shareholder.

If an amount is zero, enter, "0".

a. Determine the effects of the distribution on the gross income of Advantage Appliance and Phillipa, and on Advantage Appliance’s AAA balance.

As a result of the distribution, Advantage Appliance recognizes a capital gain of $_________ which increases Advantage Appliance’s AAA and is reported on Advantage Appliance's Schedule K, and a proportionate share of it passes through to the shareholders’ tax returns. In addition, the actual distribution of the property decreases Advantage Appliance's AAA by $________. Therefore, the overall or net effect on the AAA is a decrease of $__________. Phillipa would take a $___________ basis in the land.

b. How would your responses to part (a) change if the land had been purchased for $377,000 and now was worth $208,000?

Advantage Appliance has a realized loss of $_______, of which $0 is recognized and reported on Advantage Appliance's Schedule K. The loss decreases Advantage Appliance's AAA. In addition, the actual distribution of the property decreases Advantage Appliance's AAA by $___________. Therefore, the overall effect on the AAA is a decrease of $__________. Phillipa would take a $________ basis in the land.

Answer 1

A.

As a result of the distribution, Advantage Appliance recognizes a capital gain of $ 0 which increases Advantage Appliance’s AAA and is reported on Advantage Appliance's Schedule K, and a proportionate share of it passes through to the shareholders’ tax returns. In addition, the actual distribution of the property decreases Advantage Appliance's AAA by $ 0. Therefore, the overall or net effect on the AAA is a decrease of $ 0. Phillipa would take a $ 169000 basis in the land.

B.

Advantage Appliance has a realized loss of $ 0, of which $0 is recognized and reported on Advantage Appliance's Schedule K. The loss decreases Advantage Appliance's AAA. In addition, the actual distribution of the property decreases Advantage Appliance's AAA by $0. Therefore, the overall effect on the AAA is a decrease of $0. Phillipa would take a -$169000 basis in the land.