Case Study III

S Corporations: Shareholder Tax Basis and Net OperatingLosses

1. Mr. Kent purchased all the stock of Norman Co. on March 1,2012 for $200,000. The corporation was an S corporation throughout 2012 and 2013. During 2012 the corporation did not make any distributions and reported a net income of $22,000, of which $5,000 was attributable to the period before Kent acquired the stock. On September 1,2013, Kent sold his stock in Norman. The corporation operated at a loss of $15,000 during 2013, $3,000 of which was sustained after Kent sold his stock. Assume no 1377(a)(2) election is made.

a. Determine the amount Kent must include in his gross income for 2012.

b. Determine the amount, if any, of the corporation's net operating loss for 2013 which

Kent may deduct.

c. Calculate Kent's gain or loss if he sells his entire interest in Norman Co. for $220,000.

2. Susan Richards owns 100% of the stock of Campus Motors, a calendar year S corporation.

Ms. Richards purchased the stock of Campus in 2011 for $10,000, but had to loan the company an additional $20,000 in December 2012 because of the company's financial problems. The company gave Richards an interest bearing demand note for $20,000.

The corporation lost $8,000 in 2011, which Richards deducted on her 2011 individual income tax return.

In 2012 the corporation lost an additional $15,000, which Richards deducted on her 2012 tax return.

In 2013 the corporation repaid the $20,000 loan to Richards, and had zero taxable income. What is the tax consequence to Susan Richards of the corporation's repayment of the $20,000

loan?

3. Ralph and Carol each own half the stock of Pizzazz, inc. Pizzazz expects to have a loss of

$20,000 for 2013. Neither Ralph nor Carol has any remaining stock basis. What suggestions do you have for them?

Case Study III S Corporations: Shareholder Tax Basis and Net Operating Losses 1. Mr. Kent purchased all the stock of Norman Co. on March 1,2012 for $200,000. The corporation was an S corporation throughout 2012 and 2013. During 2012 the corporation did not make any distributions and reported a net income of $22,000, of which $5,000 was attributable to the period before Kent acquired the stock. On September 1,2013, Kent sold his stock in Norman. The corporation operated at a loss of $15,000 during 2013, $3,000 of which was sustained after Kent sold his stock. Assume no 1377(a)(2) election is made. a. Determine the amount Kent must include in his gross income for 2012. b. Determine the amount, if any, of the corporation's net operating loss for 2013 which Kent may deduct. c. Calculate Kent's gain or loss if he sells his entire interest in Norman Co. for $220,000. 2. Susan Richards owns 100% of the stock of Campus Motors, a calendar year S corporation. Ms. Richards purchased the stock of Campus in 2011 for $10,000, but had to loan the company an additional $20,000 in December 2012 because of the company's financial problems. The company gave Richards an interest bearing demand note for $20,000. The corporation lost $8,000 in 2011, which Richards deducted on her 2011 individual income tax return. In 2012 the corporation lost an additional $15,000, which Richards deducted on her 2012 tax return. In 2013 the corporation repaid the $20,000 loan to Richards, and had zero taxable income. What is the tax consequence to Susan Richards of the corporation's repayment of the $20,000 loan? 3. Ralph and Carol each own half the stock of Pizzazz, inc. Pizzazz expects to have a loss of $20,000 for 2013. Neither Ralph nor Carol has any remaining stock basis. What suggestions do you have for them