Determine taxable income in each of the following instances. Assume that the corporation is a C corporation and that book income is before any income tax expense. Required: Book income of $61,000 including capital gains of $6,000, a charitable contribution of $1,600, and meals expenses of $8,500. Book income of $103,000 including capital losses of $7,000, a charitable contribution of $14,200, and meals expenses of $2,000. Book income of $87,000 including municipal bond interest of $2,000, a charitable contribution of $5,100, and dividends of $3,200 from a 10% owned domestic corporation. The corporation also has an $7,000 charitable contribution carryover. Book income of $140,000 including municipal bond interest of $1,700, a charitable contribution of $4,000, and dividends of $6,500 from a 70% owned domestic corporation. The corporation has a capital loss carryover of $5,000 and a capital gain of $2,000 in the current year.

To the corporate entity, the basis of the cash or property received is equal to the basis in the hands of the shareholder plus any gain recognized by the shareholder. The basis of the stock in the hands of the shareholder is equal to the basis of the property contributed plus any gain recognized, minus any boot received (boot includes relief of liability). The amounts of inside and outside basis for the stockholders in each of the three previous examples are as follows: Reported Stock Basis to Shareholder Property Basis to Corporation Gain (Outside) (Inside) Marty $ -0- $ 1,000 $ 1000 Sara 0 800 800 Gina 200,000 0 300,000 Ernie 3,000 15,000 18,000 Shareholders do not recognize losses as a result of the formation of a corporation when the 80% test is met. If an individual provides services in exchange for stock upon the formation of a corporation, the individual will recognize Page 15-10 ordinary income equal to the FMV of the services. Unless a C corporation stockholder increases or decreases their proportionate ownership (buys or sells stock), there is generally no adjustment to the outside basis over time. This is not the case for Subchapter S corporations, as we will see later in this chapter