Determination of Pass-Throughs and Stock Basis Adjustments

C:11-37 Determination of Pass-Throughs and Stock Basis Adjustments
and Nancy are equal shareholders in MN Corporation, an S corporation.
The corporation, Mike, and Nancy are calendar year taxpayers. The
corporation has been an S corporation during its entire existence and
thus has no accumulated E&P. The shareholders have no loans to the
corporation. The corporation incurred the following items in the current
Sales $300,000
Cost of goods sold 140,000
Dividends on corporate investments 10,000
Tax-exempt interest income 3,000
Section 1245 gain (recapture) on equipment sale 22,000
Section 1231 gain on equipment sale 12,000
Long-term capital gain on stock sale 8,000
Long-term capital loss on stock sale 7,000
Short-term capital loss on stock sale 6,000
Depreciation 18,000
Salary to Nancy 20,000
Meals and entertainment expenses 7,800
Interest expense on loans allocable to:
Business debt 32,000
Stock investments 6,400
Tax-exempt bonds 1,800
Principal payment on business loan 9,000
Charitable contributions 2,000
Distributions to shareholders ($15,000 each) 30,000
a. Compute the S corporation’s ordinary income and separately stated items.
b. Show Mike’s and Nancy’s shares of the items in Part a.
Compute Mike’s and Nancy’s ending stock bases assuming their beginning
balances are $100,000 each. When making basis adjustments, apply the
adjustments in the order outlined on pages C:11-24 and C:11-25 of the


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