Bev and Cabel each own one-half of the stock of Finch, Inc., an S corporation with no accumulated E & P. Bev's basis in the Finch stock is $225,000. Finch's taxable income for the current year is $100,000, and it distributes $180,000 to each shareholder. Bev's stock basis at the end of the year is:
A)$0.
B)$45,000.
C)$95,000.
D)$100,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Since Bev's basis at the beginning of the year was $225,000 and Finch had no accumulated E&P, Bev's stock basis was not increased by the S corporation's taxable income of $50,000 (her share of Finch's $100,000 taxable income). However, her basis was increased by the $90,000 distribution she received (her share of Finch's $180,000 distribution). Therefore, her basis at the end of the year is $225,000 + $90,000 = $315,000. However, since her basis cannot exceed the fair market value of her stock, which is $300,000 ($600,000 overall value ÷ 2 shareholders), her basis is limited to $300,000 minus Cabel's basis (unknown). At a minimum, her basis is $225,000 (the amount she started with). Therefore, the closest answer is C) $95,000, which represents the difference between her maximum basis ($300,000) and her original basis ($225,000).

Bev and Cabel Each Own One-Half of the Stock of Finch