An S corporation, with no AEP, has net ordinary income from sales of its products of $12,000.The only distribution of profits during the year to L, its sole owner, is land with a market value of $3,000 and a basis of $2,000.L will hold the land as an investment.At the beginning of the year, L's basis in the corporation's stock was $7,500.L's basis in the stock, after all items are considered, is

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Quizplus · Accepted Answer

The net ordinary income of $12,000 is included in L's taxable income and increases their stock basis to $19,500 ($7,500 initial basis + $12,000 income).
The land distribution creates a taxable gain of $1,000 ($3,000 FMV - $2,000 basis), which decreases L's stock basis to $18,500 ($19,500 basis - $1,000 gain).
Therefore, L's basis in the stock, after all items are considered, is $18,500.

An S Corporation, with No AEP, Has Net Ordinary Income