Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Abigail and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner. Consider the following information for 2014:
• As of January 1, 2014, Abigail, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0. On January 1, the stock basis is also the at-risk amount for each shareholder.
• Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2014. Neither has any other source of passive income (besides Lafter, for Claudia).
• On March 31, 2014, Abigail lends $5,000 of her own money to Lafter.
• Anticipating the need for basis to deduct a loss, on April 4, 2014, Bobby takes out a $10,000 loan to make a $10,000 contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as collateral.
• Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2014.
• Lafter has C corporation earnings and profits of $15,000 as of January 1, 2014.
• During 2014, Lafter reports a business loss of $75,000 computed as follows:
Sales revenue ............................ $90,000
Cost of goods sold ..................... (85,000)
Salary to Abigail ........................ (40,000)
Salary to Bobby ........................ (40,000)
Business (loss) ........................ ($75,000)
• Lafter also reported $12,000 of tax-exempt interest income.
a. What amount of Lafter's 2014 business loss of $75,000 are Abigail, Bobby, and Claudia allowed to deduct on their individual tax returns? What are each owner's stock basis and debt basis (if applicable) and each owner's at-risk amount with respect to the investment in Lafter at the end of 2014?
During 2015, Lafter made several changes to its business approach and reported $18,000 of business income, computed as follows:
Sales Revenue ............................ $208,000
Cost of goods sold ....................... (90,000)
Salary to Abigail ......................... (45,000)
Salary to Bobby ......................... (45,000)
Marketing expense ..................... (10,000)
Business income ........................ $18,000
• Lafter also reported a long-term capital gain of $24,000 in 2015.
• Lafter made a cash distribution on July 1, 2015, of $20,000 to each shareholder.
b. What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2015?