Birch Corp., a calendar-year corporation, was formed three years ago by its sole
ID: 2584206 • Letter: B
Question
Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $6,600. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $34,700 business loss.
What amount of the loss clears the tax-basis limitation, and what is James’s basis in his Birch Corp. stock and Birch Corp. debt in each of the following alternative scenarios?
a. At the beginning of the year, James's basis in his Birch Corp. stock was $46,100 and his basis in his Birch Corp. debt was $6,600.
b. At the beginning of the year, James's basis in his Birch Corp. stock was $10,300 and his basis in his Birch Corp. debt was $6,600.
c. At the beginning of the year, James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $6,600.
Explanation / Answer
Amount of Loss clears the Tax Basis Limitation of Birch Corp. Scenarios a) At the beginning of the year, James's basis in his Birch Corp. stock was $46,100 and his basis in his Birch Corp. debt was $6,600. Ans. # All $34,700 of the loss clears the tax basis limitation. # Jame's stock basis is reduced to $11,400 ($46,100-$34,700) # His debt basis in Birch Corp. remains at $6,600 b) At the beginning of the year, James's basis in his Birch Corp. stock was $10,300 and his basis in his Birch Corp. debt was $6,600. Ans. # Of the $34,700 loss, $16,900 clears the tax basis limitation # Jame's stock basis is reduced from $10,300 to $0, and his debt basis in Birch Corp. reduced from $6,600 to $0. # James has a suspended loss of $29,200 ($46,100-$16900) c) At the beginning of the year, James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $6,600. Ans. # $6,600 clears the tax basis limitation. # Jame's stock basis remains at $0, and his debt basis in Birch Corp. reduced from $6,600 to $0. # James has a suspended loss of $39,500 ($46,100-$6,600)
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