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29 August, 18:42

Amos and Thomas form the Show Corporation during the current year. Amos owns 40% of Show's stock, Thomas owns 20%, and Arthur owns the remaining 40%. Amos paid $50,000 for his interest, and Thomas paid $25,000. Amos and Thomas are responsible for Show's daily operations and serve as co-chief executive officers. During the current year, Show Corporation has an operating income of $60,000 and pays out $10,000 in dividends. Determine Amos's and Thomas's adjusted bases in the Show Corporation stock based on the type of entity described.

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  1. 29 August, 19:38
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    A. Amos's basis is $50,000

    and Thomas's is $25,000

    B. Adjusted basis - End of year $ 70,000 $ 35,000

    Explanation:

    A. Show Corporation as a corporation.

    Show Corporation is a separate taxable entity. The $60,000 operating income is taxed using the corporate tax rate schedule.

    The Show corporation's tax liability is $10,000 [$7,500 + ($60,000 - $50,000

    = $10,000 x 25%) ].

    Amos reports $4,000 ($10,000 x 40%) and

    Thomas reports $2,000 ($10,000 x 20%) of dividend income.

    Therefore neither the taxable income reported by Show nor the dividends paid affects a shareholder's basis.

    Amos's basis is $50,000

    and Thomas's is $25,000.

    b. Show Corporation as an S corporation.

    Amos and Thomas's basis at the end of the current year:

    Amos Thomas

    Original investment - At cost $ 50,000 $ 25,000

    Add: Additional investment

    Share of income Amos $60,000 x 40% 24,000

    Thomas $60,000 x 20% 12,000

    Less: Recoveries of capital

    Dividends received (4,000) (2,000)

    Adjusted basis - End of year $ 70,000 $ 35,000
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