Cactus Corporation, an S corporation, had accumulated earnings and profits of $100,000 at the beginning of 2017. Tex and Shirley each own 50% of the stock and have a basis in their stock of $50,000 on January 1, 2017. Cactus does not make any distributions during 2009, but had $200,000 of ordinary income. In 2018, ordinary income was $100,000 and distributions were $100,000. What is Tex's basis at January 1, 2019?

Question

Quizplus · Accepted Answer

Since Cactus Corporation did not make any distributions in 2017, the entire $200,000 of ordinary income for that year is allocated as taxable income to Tex and Shirley. Each of them will report $100,000 of taxable income, and their bases in the stock will increase by that amount to $150,000 each.

For 2018, since Cactus Corporation made distributions of $100,000, each shareholder will reduce their basis by their share of the distribution. Tex must reduce his basis by $50,000 (50% of $100,000), leaving him with a basis of $100,000 at the end of 2018.

Since there were no additional distributions or income allocations in 2019, Tex's basis remains at $100,000 on January 1, 2019.

Cactus Corporation, an S Corporation, Had Accumulated Earnings and Profits