Brandon and Jennifer are equal shareholders in Lilly Corporation, an S corporation. The corporation, Brandon, and Jennifer 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 year:
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
Salary to Jennifer 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 Brandon’s and Jennifer’s shares of the items in Part a.
c. Compute Brandon’s and Jennifer’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 text.