Case Study #4: ABC, Inc. Total Points: Team members: 200 FACTS: Andy, Brad, and Charlie are equal owners in ABC, Inc., an S corporation that was formerly a C corporation several years ago. While Andy and Brad actively participate in running the company, Charlie has a separate day job and is a passive owner. Consider the following information for 2023: As of January 1, 2023, Andy, Brad, and Charlie each has a basis in ABC stock of $12,000 and a debt basis of $0. On January 1, the stock basis is also the at-risk amount for each shareholder. Brad and Charlie are also passive owners in Action, LLC, which allocated business income of $8,000 to each of them in 2023. Neither has any other source of passive income (besides ABC, for Charlie). On March 31, 2023, Andy lends $5,000 of his own money to ABC. On April 4, 2023, Brad lends $7,000 of his own money to ABC. ABC has an accumulated adjustments account balance of $30,000 as of January 1, 2023. ABC has C corporation earnings and profits of $12,000 as of January 1, 2023. During 2023, ABC reports a business loss of $63,000, computed as follows: Sales revenue $105,000 Cost of goods sold (68,000) Salary to Andy (50,000) Salary to Brad (50,000) (63,000) Business loss ABC also reported $9,000 of tax-exempt interest income. Requirement #1 (100 points): Complete the charts below to compute each shareholder's ending stock and debt basis. Then, based on the facts above, determine the amount of loss each shareholder can deduct on their individual income tax return and how much loss is suspended. Andy: Description Basis, 1/1/23 Loan to S-Corp. Separately stated tax-exempt interest Basis before business loss Business loss Basis, 12/31/23 Amount of loss Andy can deduct: $ Andy's suspended loss amount (if any): $ Stock basis Debt basis Brad: Description Basis, 1/1/23 Loan to S-Corp. Separately stated tax-exempt interest Basis before business loss Business loss Basis, 12/31/23 Amount of loss Brad can deduct: $ Brad's suspended loss amount (if any): $ Charlie (a passive owner): Description Basis, 1/1/23 Loan to S-Corp. Separately stated tax-exempt interest Basis before business loss Business loss Basis, 12/31/23 Amount of loss Charlie can deduct: $ Charlie's suspended loss amount (if any): $ Stock basis Debt basis Stock basis Debt basis Requirement #2 (75 points): During 2024, ABC made several changes to its business approach and reported $27,000 of business income, computed as follows: Sales revenue Cost of goods sold Salary to Andy Salary to Brad Marketing expense Business income $217,000 (90,000) (45,000) (45,000) (10,000) $27,000 ABC also reported a long-term capital gain of $9,000 in 2024. ABC made a cash distribution on July 1, 2024 of $30,000 to each shareholder. a. Using the chart below, calculate the ending AAA balance at 12/31/24. Description Amount AAA balance, 1/1/23 2023 business loss AAA balance, 1/1/24 2024 business income 2024 long-term capital gain AAA balance, 12/31/24 before distributions Distributions AAA balance, 12/31/24 after distributions b. How much of the 2024 distribution comes from AAA? $ In general, how are distributions from AAA taxed to the shareholder? c. How much of the 2024 distribution comes from E&P? How are distributions from E&P taxed to the shareholder? d. How much of the 2024 distribution is a return of capital? $ How are distributions that are a return of capital taxed to the shareholder? e. If a distribution exceeds AAA, E&P and return of capital, how is the remainder of the distribution taxed? Requirement #3 (25 points): In early 2025, Andy wants to terminate the S election, but Brad and Charlie disagree. Can Andy terminate the S-election without Brad and Charlie's consent? Yes / No Explain your answer: Suppose Andy and Brad agree to terminate the S-election on March 14, 2025, when would be the earliest date the S termination would be effective? Date: