Birch Corp., a calendar-year corporation, was formed three years ago by its sole
ID: 2597150 • 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 $7,450. 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 $34,200 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?
At the beginning of the year, James's basis in his Birch Corp. stock was $52,700 and his basis in his Birch Corp. debt was $7,450.
b. At the beginning of the year, James's basis in his Birch Corp. stock was $10,200 and his basis in his Birch Corp. debt was $7,450.
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 $7,450.
Explanation / Answer
1. At the beginning of the year, James's basis in his Birch Corp. stock was $52,700 and his basis in his Birch Corp. debt was $7,450.
Explanation : Birch loss is accounted for 34200. Therefore the tax basis limitation clears 34200. James value of stock in Birch has down from 52700 to 18500 (52700 - 34200) ( Value of stock - loss)
2. At the beginning of the year, James's basis in his Birch Corp. stock was $10,200 and his basis in his Birch Corp. debt was $7,450.
Explanation: James's Basis in his Birch corp stock was 10200 and debt 7450. Therefore the tax bais limitation clears 17650 ( Stock + Debt) of the Birch total loss of 34200. James stock value of 10200 and Debt of 7450 has come down to 0 dollars. The loss of James out of investment in Birch Corp is 16550 (34200 - 17650)
3.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 $7,450.
7450 in the form debt is the tax basis limitation out of the total loss of 34200. The stock and debt basis becomes 0 and total loss becomes 26750 (34200 - 7450 )
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