P Corporation was formed in 1981 by its two equal shareholders, Nancy and Opal,
ID: 2721817 • Letter: P
Question
P Corporation was formed in 1981 by its two equal shareholders, Nancy and Opal, and elected S corporation status at the beginning of the current year. On January 1, Nancy had a $1,000 basis in her P stock and Opal had a $5,000 basis in her stock. P has $6,000 of AEP from its prior C corporation operations and has the following results from operations this year:
Gross Income $32,000
LTCG 4,000
Salary Expense 18,000
Depreciation 8,000
What are the tax consequences to Nancy, Opal and P Corporation in the following alternative situations?
(a) On November 1, P distributes $5,000 to Nancy and $5,000 to Opal.
(b) Same as (a), above, except that P distributes $10,000 to Nancy and $10,000 to Opal.
(c) What difference would it make in (a), above, if P also received $4,000 of tax-exempt interest during the year and distributed $2,000 of the interest to Nancy and $2,000 to Opal?
(d) During the current year P makes no distributions. On January 1 of next year Nancy sells her P stock to Rose for $6,000. If P breaks even on its operations next year, what will be the result to Rose if P distributes $6,000 to each of its shareholders next February 15?
(e) During the current year P makes no distributions. Nancy and Opal revoke P's Subchapter S election effective January 1 of next year. Assume P Co. has $5,000 of earnings and profits next year. What results to Nancy and Opal if P distributes $7,000 to each of them on August 1 of next year?
Explanation / Answer
Nancy
Opal
Initial Stock Basis
1k
5k
6k ordinary income
3k
3k
4k LTCG
2k
2k
AB in stock
6k
10k
Distribution
(5k)
(5k)
AB in stock
1k
5k
Nancy
Opal
Initial Stock Basis
1k
5k
6k ordinary income
3k
3k
4k LTCG
2k
2k
AB in stock
6k
10k
$10k Distribution
§ 1368(c)(1)
(5k)
(5k)
AB in stock
1k
5k
$4k Distribution
§ 1368(c)(3)
($2k)
($2k)
AB in stock
0
0
Nancy
Opal
Initial Stock Basis
1k
5k
6k ordinary income
3k
3k
4k LTCG
2k
2k
AB in stock
6k
10k
Distribution
(5k)
(5k)
AB in stock
1k
5k
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