Question
Regula, Leonel, and Aggripina each own 100 shares of Cudgel, Inc., an S corporation that was a C corporation several years ago. While Regula and
Regula, Leonel, and Aggripina each own 100 shares of Cudgel, Inc., an S corporation that was a C corporation several years ago. While Regula and Leonel actively participate in running the company, Aggripina has a separate day job and is a passive owner. Consider the following information for 2022:
Part 1
As of January 1, 2022, Regula, Leonel, and Aggripina each has a basis in Cudgel stock of $10,000 and a debt basis of $5,000. These loans are shareholder loans and cash was actually advanced to the corporation. On January 1, the stock basis is also the at-risk amount for each shareholder.
Leonel and Aggripina also are passive owners in Pangloss LLC, which allocated business income of $10,000 and related passive expenses of $20,000 to each of them in 2022. Neither has any other source of passive income (besides Cudgel, for Aggripina).
On March 31, 2022, Regula lends $7,500 of her own money to Cudgel.
Anticipating the need for basis to deduct a loss, on April 4, 2022, Leonel takes out a $20,000 loan to make a $20,000 capital contribution to Cudgel. Leonel uses his automobile ($70,000 fair market value) as the sole collateral for his loan (nonrecourse).
Cudgel has an accumulated adjustments account balance of $105,000.00 as of January 1, 2022.
Cudgel has C corporation earnings and profits of $45,000 as of January 1, 2022.
Business (loss)
During 2022, Cudgel reports a business loss of ($120,000), computed as follows:
Sales revenue $130,000
Cost of goods sold -130,000
Salary to Regula
Salary to Leonel -120,000
($120,000)
Cudgel also reported $12,000 of tax-exempt interest income.
$2500 of Dividends
$3000 of Taxable interest
$2500 of Investment Expenses ($500 allocable to Tax exempt interest)
- What amount of Cudgels 2022 business loss of $120,000 are Regula, Leonel, and Aggripina allowed to deduct on their individual tax returns? What are each owners stock basis and debt basis (if applicable) and each owners at-risk amount with respect to the investment in Cudgel at the end of 2022?
Part II
During 2023, Cudgel 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 Regula (45,000)
Salary to Leonel (45,000)
Marketing expense (10,000)
Business income $18,000
- Cudgel also reported a long-term capital gain of $24,000 in 2023.
- Cudgel made a cash distribution on July 1, 2023, of $20,000 to each shareholder.
- What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2023?
Prepare a Form 1120-S for Cudgel for 2023
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