S Corporation: Entity/Owner Transactions, Including Contributions and Distributions

Question 1

S corporation distributions are

Answer 1

(1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul)
(2) taxable to the extent of accumulated earnings and profits (C corporation earnings),
(3) any remaining distributions are a return of capital (capital gains)

Question 2

Loss on stock redemption

Answer 2

is not recognized until liquidation is complete

Question 3

Although debt provides basis for the purpose of deducting losses

Answer 3

it is not considered basis for purposes of distributions

As a result the debtwill be treated as a capital gain because Clyde had no stock basis.

Had it been a debt repayment, instead of as a distribution, No income would have been recognized

Question 4

Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order:

Answer 4

1) Increased for income items and excess depletion;
2) Decreased for distributions;
3) Decreased for non-deductible, non-capital expenses and depletion; and
4) Decreased for items of loss and deduction.