Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1,2015.During 2015,Duvall Corporation reports a loss of $60,000 and pays cash dividends to shareholders of $5,000.For 2016,Duvall Corporation has income of $200,000 and pays cash dividends of $40,000.If Duvall Company is organized as an S Corporation,Sammy's basis in the Duvall Corporation stock at the end of 2016 is:
A)$88,000
B)$89,000
C)$100,000
D)$119,000
E)$128,000

Question

Quizplus · Accepted Answer

When Sammy buys a 20% interest in Duvall Corporation for $100,000, his basis in the stock is also $100,000, as it is a cash purchase. 
In 2015, he must reduce his basis by his share of the losses, so his basis becomes $88,000 (100,000 - 20% of 60,000). He also reduces his basis by his share of the dividends received, so his basis becomes $87,000 (88,000 - 20% of 5,000). 
In 2016, he increases his basis by his share of the income, so his basis becomes $127,000 (87,000 + 20% of 200,000). He also reduces his basis by his share of the dividends received, so his basis becomes $119,000 (127,000 - 20% of 40,000). Therefore, the correct answer is D, $119,000.

Sammy Buys a 20% Interest in Duvall Corporation Paying $100,000