Anna owns 20% of Cross Co., an electing S corporation. Anna's adjusted basis in the stock is $32,000 at the beginning of the current year. During the current year, Cross pays a $50,000 cash dividend to its shareholders. Cross Co. reports a $200,000 operating loss for the current year. Which of the following statements is/are correct?
I.If Anna is a material participant in Chris Co., she can deduct a $40,000 loss.
II.Anna's maximum loss deduction is limited to $22,000.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Anna owns 20% of Cross Co., an electing S corporation. Anna's adjusted basis in the stock is $32,000 at the beginning of the current year. During the current year, Cross pays a $50,000 cash dividend to its shareholders. Cross Co. reports a $200,000 operating loss for the current year. Which of the following statements is/are correct?
I.If Anna is a material participant in Chris Co., she can deduct a $40,000 loss.
II.Anna's maximum loss deduction is limited to $22,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

As Anna's adjusted basis is only $32,000 and Cross Co. reports a $200,000 operating loss, Anna's maximum loss deduction is limited to $22,000 (20% of $110,000, which is the excess of the adjusted basis over the cash dividend received). Her being a material participant in Cross Co. does not affect this limit. Therefore, only statement II is correct.

Anna Owns 20% of Cross Co