85. 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 2019:

As of January 1, 2019, 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 2019. Neither has any other source of passive income (besides Lafter, for Claudia).

On March 31, 2019, Abigail lends $5,000 of her own money to Lafter.

Anticipating the need for basis to deduct a loss, on April 4, 2019, 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 the sole collateral for his loan (nonrecourse).

Lafter has an accumulated adjustments account balance of

$45,000 as of January 1, 2019.

Lafter has C corporation earnings and profits of $15,000 as of January 1, 2019.

During 2019, 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 2019 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 2019?

During 2020, 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 2020.
Lafter made a cash distribution on July 1, 2020, of $20,000 to each shareholder.

b. What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2020?