- At the beginning of 2025, a taxpayer owned all of the stock of an S corporation and her adjusted basis in the stock was $50,000. During 2025, the corporation reported $40,000 of ordinary business income (determined before any charitable contribution deduction). It also contributed to a qualified charity a long-term capital asset with an adjusted basis of $10,000 and a fair market value of $25,000. The contribution passed through to the taxpayer as a $25,000 charitable contribution deduction that she may use in full. The corporation made no distributions. What is the taxpayer's adjusted basis in the stock at the end of 2025?
Answer: $80,000
IRC §1367(a)(2)(B). When an S corporation contributes appreciated property to charity, the shareholder's stock basis is reduced by her pro rata share of the adjusted basis of the contributed property, not by the fair market value or the separately stated charitable deduction. Choice D is correct: $50,000 + $40,000 − $10,000 = $80,000. Choice A reduces basis by the $25,000 fair market value of the property. Choice B also nets the $25,000 contribution deduction against current income before applying the $10,000 basis adjustment. Choice C ignores the required basis reduction for the contribution.
- How much of the loss may Mateo deduct for 2025, and what happens to any disallowed loss?
Answer: He may deduct $5,000, carry over $35,000, and end the year with a $0 stock basis; the distribution is not taxable.
IRC §§ 1366(d)(1), 1367(a), 1368(b); Treas. Reg. § 1.1367-1(c). A tax-free S corporation distribution is taken into account before current-year losses. Because the corporation had no accumulated earnings and profits, the $25,000 cash distribution is not taxable and reduces Mateo's stock basis from $30,000 to $5,000. The $40,000 ordinary loss is allowed only to the extent of his remaining $5,000 stock basis, so $5,000 is deductible and $35,000 is suspended and carried over under IRC § 1366(d)(2). Choice A applies the loss before the distribution, incorrectly treating the distribution as still tax-free. Choice C also applies the loss before the distribution and then treats the distribution as a taxable capital gain. Choice D ignores the stock-basis limitation entirely.
- What is Rosa's initial adjusted basis in the S corporation stock?
Answer: Her initial adjusted basis in the stock is $0.
IRC §§ 358(a), 357(c). In an otherwise tax-free § 351 transfer, stock basis is the adjusted basis of the property transferred, decreased by liabilities assumed by the corporation, and increased by any gain recognized. Because the $80,000 mortgage exceeds the $60,000 adjusted basis, Rosa recognizes $20,000 of gain under § 357(c). Her stock basis is therefore $60,000 - $80,000 + $20,000 = $0. Choice B treats basis as fair market value less the mortgage. Choice C ignores the liability assumption. Choice D uses fair market value as basis.
- What amount of Osprey's 2025 income is allocated to Greg, and what is his stock basis on December 31, 2025?
Answer: $30,600 of income; $70,600 basis
IRC § 1377(a)(1); Treas. Reg. § 1.1377-1(a)(2); IRC § 1367(a)(1)(A). Because Osprey did not make a § 1377(a)(2) closing-of-the-books election, its 2025 items are allocated per share, per day. The daily ordinary income is $146,000/365 = $400. Greg's 25% share is $100 per day for 306 days (March 1 through December 31). Faith is treated as the shareholder for February 28, the day of transfer, so Greg's ownership begins March 1. Thus Greg's income is $100 × 306 = $30,600. This pass-through income increases Greg's stock basis: $40,000 + $30,600 = $70,600. Choice A approximates by months rather than the statutory daily method. Choice B computes the correct income share but fails to increase stock basis by the pass-through income. Choice D allocates a full 25% interest to Greg for the entire year, ignoring Faith's 59-day ownership period.
- What is Omar's adjusted basis in the S corporation stock at the end of 2025?
Answer: $36,000
IRC § 1367(a). A shareholder's stock basis is increased by pass-through income items, including tax-exempt interest and ordinary business income, and decreased by pass-through deductions and by nondeductible expenses not properly chargeable to capital account. Omar's end-of-year basis is $30,000 + $8,000 + $5,000 - $4,000 - $3,000 = $36,000, so Choice C is correct. Choice B omits the tax-exempt interest increase. Choice A omits the nondeductible penalty decrease. Choice D omits both the charitable contribution decrease and the nondeductible penalty decrease.
- What amount of Alden's 2025 loss may Kira deduct, and what is her basis in the Alden note after applying the loss?
Answer: $30,000 loss; $0 note basis
IRC § 1366(d)(1) and Treas. Reg. § 1.1367-1(f). The $10,000 distribution is a nondividend distribution because Alden has no accumulated earnings and profits, so it reduces stock basis before losses are applied: $15,000 - $10,000 = $5,000. Kira's total loss limit is $5,000 stock basis plus $25,000 note basis, or $30,000. The loss reduces stock basis to zero, then reduces note basis to zero under IRC § 1367(b)(2); the remaining $30,000 is suspended and carried over under IRC § 1366(d)(2). Choice A ($5,000) limits the deduction to the stock basis remaining after the distribution and does not use the $25,000 note basis. Choice C ($40,000) applies the loss before reducing stock basis for the distribution. Choice D ($60,000) ignores the basis limitation of IRC § 1366(d)(1).
- What are the tax consequences of the distribution to Priya for 2025?
Answer: She has a $30,000 long-term capital gain, and her loan basis remains $20,000.
IRC §§ 1368(b), 1367(a)(2)(A). A distribution from an S corporation with no accumulated earnings and profits is applied against and reduces the shareholder's stock basis, and the excess is treated as gain from the sale or exchange of stock. A distribution does not reduce the basis of shareholder debt. Priya had $0 stock basis, so the entire $30,000 distribution is gain, and because she held the stock for more than one year it is long-term capital gain. Her $20,000 loan basis remains unchanged. Choice A incorrectly treats the distribution as a dividend and reduces the debt. Choices C and B incorrectly use the loan basis to absorb the distribution.
- At the beginning of 2025, a taxpayer owned all of the stock of an S corporation that had no accumulated earnings and profits. Her adjusted basis in the stock was $40,000, and she had no basis in any corporate debt. For 2025, her Schedule K-1 reported $25,000 of ordinary business income, $3,000 of tax-exempt interest income, $2,000 of nondeductible penalties and fines, and an $8,000 cash distribution. What is the taxpayer's adjusted basis in the S corporation stock at the end of 2025?
Answer: $58,000
IRC §1367(a) requires stock basis to be increased by the shareholder's share of taxable and tax-exempt income and decreased by nondeductible, noncapital expenses and by distributions not included in income. Choice B is correct: $40,000 + $25,000 + $3,000 − $2,000 − $8,000 = $58,000. Choice A omits the $3,000 tax-exempt interest increase; tax-exempt interest is a separately stated income item that increases basis even though it is not taxable. Choice C omits the $2,000 reduction for nondeductible penalties and fines. Choice D fails to reduce basis for the $8,000 distribution; although it is not taxable because it does not exceed basis, it is still a return of basis that reduces basis under §1367(a)(2)(A).
- What are Paula's basis in her PR stock and PR's basis in the equipment?
Answer: $10,000 stock basis; $40,000 corporate basis
IRC §§ 357(a), 357(c), 358(a) and (d), and 362(a). Under § 357(a), PR's assumption of the $30,000 liability is not treated as money or other property received, so it does not cause gain recognition. Section 357(c) does not apply, because the $30,000 liability does not exceed Paula's $40,000 basis in the equipment. For computing Paula's stock basis, however, § 358(d) treats the assumed liability as money received. Her stock basis is $40,000 − $30,000 = $10,000. Under § 362(a), PR takes Paula's $40,000 basis in the equipment, increased by gain she recognized, which is $0; the liability assumption does not reduce the corporation's basis. Choice A is correct. Choice B is wrong because a corporation receiving property in a § 351 exchange takes a carryover basis, not the $100,000 fair market value. Choice C is wrong because it ignores the § 358(d) reduction of Paula's stock basis for the $30,000 liability. Choice D is wrong because it uses the equipment's net fair market value ($100,000 − $30,000 = $70,000) as stock basis; stock basis starts from the adjusted basis of the property transferred.
- At the beginning of 2025, a taxpayer owned all of the stock of an S corporation. Her adjusted basis in the stock was $12,000, and her adjusted basis in a promissory note issued by the corporation to her was $9,000. She materially participates in the corporation's active business and is at risk for the full amount of her adjusted bases. For 2025, the corporation had an ordinary loss of $16,000 and made no distributions. What amount of the loss may the taxpayer deduct for 2025, and what are her bases in the stock and the note at the end of 2025?
Answer: Deduct $16,000; stock basis $0; note basis $5,000.
IRC §§1366(d)(1) and 1367(b)(2). A shareholder may deduct an S corporation loss only to the extent of combined basis in stock and debt, and the loss reduces stock basis before debt basis. Because the taxpayer materially participates and is at risk for the full amount of her bases, the basis limitation is the controlling shareholder-level limit. Choice C is correct: combined basis is $21,000, so the $16,000 loss is allowed in full; stock basis falls from $12,000 to $0 and note basis falls from $9,000 to $5,000. Choice A applies the loss to the note before the stock. Choice B ignores the note basis and limits the deduction to stock basis. Choice D uses only the note basis, leaving the stock basis unchanged.
- At the beginning of 2025, a taxpayer owned all of the stock of an S corporation that had no accumulated earnings and profits. His adjusted basis in the stock was $15,000, and he had held the stock for more than one year. During 2025, the corporation had $20,000 of ordinary business income and distributed $50,000 cash to him. There were no other items. How should the taxpayer report the distribution for 2025?
Answer: $35,000 is a nontaxable return of basis; $15,000 is long-term capital gain.
IRC §§1368(b) and 1367(a). For an S corporation with no accumulated earnings and profits, a distribution is tax-free to the extent of the shareholder's adjusted stock basis, and the excess is treated as gain from the sale or exchange of stock. Choice C is correct: current-year ordinary income of $20,000 is included in income and increases the $15,000 beginning basis to $35,000, so $35,000 is a nontaxable return of basis and the remaining $15,000 is long-term capital gain. Choice A uses beginning-of-year basis rather than basis after current-year income. Choice B limits the nontaxable amount to current-year income, which is not the §1368(b) test. Choice D treats the distribution as an ordinary dividend, a result that requires accumulated earnings and profits, which the facts negate.
- What was Jade's adjusted basis in the stock immediately before the sale, and what was her gain or loss on the sale?
Answer: Her basis was $58,000, and she recognized a $12,000 gain.
IRC §§ 1366(a), 1367(a)(1); IRC § 1001(a). A shareholder takes into account her pro rata share of S corporation ordinary income (nonseparately computed income) and increases her stock basis by that share. Jade's share of the $36,000 ordinary income is $18,000, so her basis before the sale is $40,000 + $18,000 = $58,000. Her gain is the $70,000 amount realized less her $58,000 basis, or $12,000. Choice B fails to increase basis for the passed-through income before measuring gain. Choice A adds the corporation's entire $36,000 of income to her basis. Choice D uses the correct basis but computes the gain using the $40,000 beginning basis rather than the $58,000 adjusted basis; $70,000 − $58,000 is $12,000.
- An S corporation uses the calendar year and has two equal shareholders. On July 1, 2025, one shareholder sells all of his stock to the other. No election under §1377(a)(2) is made. The corporation's ordinary income for 2025 was earned unevenly, with most of it in the first six months. Which of the following is correct regarding the allocation of the corporation's 2025 ordinary income between the selling shareholder and the buying shareholder?
Answer: It is allocated on a per-share, per-day basis over the entire year, regardless of when the income was actually earned.
IRC §1377(a)(1). If no election is made under §1377(a)(2), S corporation items are allocated on a per-share, per-day basis over the entire taxable year without regard to when income was actually earned. Choice A is correct. Choice B describes the interim-closing-of-the-books method, which is available on a complete termination of a shareholder's interest only if the corporation and all affected shareholders consent; it is not mandatory. Choice C confuses distributions with the allocation of taxable income, and distributions are not the basis for allocating Schedule K-1 items. Choice D incorrectly looks only to year-end ownership.
- How much of the 2025 loss may Priya deduct, and what is her end-of-year stock basis?
Answer: She may deduct $12,000 and end with a $0 stock basis; the remaining $16,000 is suspended and carried forward.
IRC § 1366(d)(1). A shareholder may deduct an S corporation loss only to the extent of the adjusted basis in stock plus the adjusted basis in indebtedness of the corporation to the shareholder. A shareholder's guarantee of corporate debt, standing alone, is not an indebtedness of the corporation to the shareholder and does not create basis. She made no payment under the guarantee, so her only basis is the $12,000 stock basis. The remaining $16,000 loss is carried forward under IRC § 1366(d)(2). Choice A treats the guarantee as debt basis. Choice C misstates the carryover as permanent. Choice D confuses the at-risk rules with the basis limitation; a mere guarantee is not an amount at risk and does not create basis.
- What are Nolan's adjusted bases in the stock and in the loan at the end of 2025?
Answer: His basis in the stock is $0, and his basis in the loan is $18,000.
IRC §§ 1367(a), 1367(b)(2); Treas. Reg. § 1.1367-2(c). For 2025, Nolan's increases in basis are the $18,000 of ordinary income. His decreases are the $3,000 distribution and the $7,000 capital loss, so the net increase is $8,000. Because his loan basis was reduced in prior years, this $8,000 net increase is applied to restore the loan basis before any increase in stock basis. The loan basis therefore becomes $18,000 ($10,000 + $8,000), and the stock basis remains $0. Choice B ignores the required debt-basis restoration, applies the income to stock, and leaves the loan at $10,000. Choice C restores the loan but omits the $7,000 capital loss. Choice D double-counts the $8,000 net increase by both restoring the loan and increasing stock basis.
