Question

At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $15,200 and accumulated E&P of $20,250 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $20,250 distribution (the remaining shareholders received $30,375 in distributions). Assume her stock basis is $40,500 after considering her share of Bombay’s income for the year but before considering the effects of the distribution.

Required:

What is the amount and character of gain Nicolette must recognize from the distribution?

What is her basis in her Bombay stock at the end of the year?

Answer 1

Part 1

Dividend $ 8100 Return of capital $ 12150 (20250-8100). Therefore, Nicolette must recognize the capital gain of $20250 from the distribution .

Part 2

her basis in her Bombay stock at the end of the year = $28350

Description	Amount	Explanation
(1) Total Distribution	20250
(2) Bombay AAA Beginning Balance	15200
(3) Distribution from AAA	15200	Less (1) or (2)
(4) Prop in Excess of AAA	20250
(5) Nicolette’s Share Basis	6080	(3) x 40% nontaxable
(6) Nicolette’s Beginning Stock	40500
(7) Nicolette’s Reduced basis	34420	(6) – (5)
(8) Bombay E&P	20250
(9) Dividend distribution E&P	20250
(10) Nicolette’s share dividend	8100	(8) x 40%
(11) Nicolette’s Share Basis	6070	(8) – (5) – (10)
(12) Nicolette’s Ending Basis	28350	(7) – (11)