3. R Inc. is an S corporation with no E&P. It has three shareholders: J, D, and Q. The shareholders’ tax basis in their R shares is as follows:

               

Shareholder	Number of Shares	Tax Basis
J	3,200	$150,000
D	4,800	50,000
Q	8,000	200,000

        In the current year, R distributed $240,000 to the shareholders.

1. a.Assume that the distribution was divided equally among the shareholders: $80,000 each. Would R qualify for classification as an S corporation? Explain.

2. b.Assume instead that the distribution was divided proportionally among the shareholders, based on the number of shares each owns: $48,000 to J, $72,000 to D, and $120,000 to Q. How much income would each shareholder recognize in connection with the distribution, and what would be its character?

3. c.In question b above, what would be each shareholder’s remaining basis in his or her R stock after receipt of the distribution?

4. Assume that in addition to the amount invested in R, Inc. for shares of stock, D also loaned $100,000 to the company. If the principal balance of the loan at the date of the distributions had been $62,000, how would your answer in b above change?

Answer rating: 100% (QA)

a For S Corporation each shareholders share of any item for any taxable y... View the full answer