Cactus Corporation,an S Corporation,had accumulated earnings and profits of $100,000 at the beginning of 2009.Tex and Shirley each own 50% of the stock and have a basis in their stock of $50,000 on January 1,2009.Cactus does not make any distributions during 2009,but had $200,000 of ordinary income.In 2010,ordinary income was $100,000 and distributions were $100,000.What is Tex's basis at January 1,2011?

Question

Quizplus · Accepted Answer

Tex's share of accumulated earnings and profits at the beginning of 2009 was $50,000 (50% of $100,000). In 2009, Cactus Corporation had $200,000 of ordinary income but did not make any distributions, so the accumulated earnings and profits at the end of 2009 were $300,000 (50% of $200,000 + $50,000). In 2010, ordinary income was $100,000, and distributions were $100,000, so the accumulated earnings and profits at the end of 2010 were still $300,000. Therefore, Tex's basis at January 1, 2011, would be $150,000 (50% of $300,000).

Cactus Corporation,an S Corporation,had Accumulated Earnings and Profits of $100,000