J formed R Corporation in 1986. The corporation operated as a C corporation from 1987 until 2006, when it elected to be taxed as an S corporation. At the beginning of the current year, J had a basis in his stock of $100,000. The corporation’s balance in the AAA at the beginning of the current year was $143,000. R’s records for the current year reveal the following information:

Sales	$300,000
Cost of goods sold	(120,000)
Miscellaneous operating expenses	50,000
Salary to J	40,000
Nondeductible portion of entertainment	4,000
Tax-exempt interest income	13,000
Expenses related to tax-exempt interest income	3,000
Capital gain	7,000
Capital loss	(2,000)
Charitable contribution	5,000
Cash distribution to J	10,000

The corporation also had AE&P from C years of $4,000.

Compute J’s basis in his stock and the corporation’s balance in the AAA as of the end of the taxable year. Assume J is the sole shareholder.

2. Assume the same facts as problem 1 above. Explain the tax treatment to J if he receives the following distributions during the year:

1. $100,000
2. $220,000
3. $260,000

Answer rating: 100% (QA)

To compute Js basis in his stock and the corporations balance in the AAA as of the end of the taxable year we need to consider the various transaction... View the full answer