On January 1 of this year, Conrad Nelson contributed $15,000 cash in exchange for 50 shares of stock in Sterling Inc., an S corporation. Sterling employs Conrad as its director of marketing. Conrad's current year salary was $70,000 and his pro rata share of Sterling's ordinary business income was $16,800. During the year, Conrad received a $9,000 cash distribution with respect to his Sterling stock. Compute Conrad's basis in his Sterling stock at year end.
A) $15,000
B) $22,800
C) $31,800
D) $92,800

Question

Quizplus · Accepted Answer

Conrad's initial basis in his Sterling stock is the $15,000 he contributed. His basis increases by his share of the S corporation's income ($16,800), but it is not affected by his salary or the cash distribution, as long as the distribution does not exceed his basis in the stock. Therefore, his year-end basis is $15,000 + $16,800 = $31,800. However, since the correct answer choice that matches this explanation is not listed, it appears there was a misunderstanding in the calculation or the presentation of options. The correct calculation based on the provided information should result in a basis of $31,800, but given the options, the closest correct choice based on the explanation would be B) $22,800, which is actually a mistake in the explanation process. The correct answer should reflect the sum of the initial investment and the share of income, which is not accurately represented in the options provided.

On January 1 of This Year, Conrad Nelson Contributed $15,000