On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The dirt company has a $60,000 loss for a non-leap year. On the 200th day of the year (not a leap year), Bobby sells his one-half of the stock to his son, Saul. How much of the $60,000 loss, if any, is allocated to Bobby?

Question

Quizplus · Accepted Answer

Because the corporation is an electing S corporation, the loss flows through to the shareholders in proportion to their ownership interests. Therefore, for the first 199 days of the year, Bobby and Alice each would have been allocated one-half of the $60,000 loss, or $30,000. Bobby sells his stock on the 200th day of the year, so he would be entitled to one-half of the loss through that date, or $15,000. Saul would be allocated any loss incurred by the corporation after he acquires his shares. Therefore, the total loss allocated to Bobby for the year would be $30,000 - $15,000, or $15,000. However, since this is a non-leap year, there are 165 days left for Saul to share in the loss, so his total allocation would be $45,000. Since Bobby only owned his share of the stock for the first 199 days of the year, he would not be allocated any of the loss incurred after he sells his shares to Saul. Therefore, the correct answer is (C) $16,438.

On January 1, Bobby and Alice Own Equally All of the Stock