Tammy organized Sweets Corporation in January of the current year, and the corporation immediately elected to be an S corporation. Tammy, who contributed $40,000 in cash to start the business, owns 100% of the corporation’s stock. Sweets’ current year results are reported below:
Ordinary income ………………..$36,000
Short-term capital loss …………. 5,000
On July 10, Sweets makes a $10,000 cash distribution to Tammy.
a. What income (if any) do Sweets and Tammy recognize as a result of the distribution?
b. What is Tammy’s basis for the Sweets stock on December 31?
c. How would your answers to Parts a and b change if Sweets’ distribution were instead $80,000?