XYZ Corporation (an S corporation) is owned by Jane and Rebecca who are each 50% shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2016.

Description Sales revenue Cost of goods sold Long-term capital gain Dividend income Tax exempt interest Salary to owners Employee wages Description expenses Miscellaneous expenses Overall net income

Amount $730,000 (200,000) 8,000 5,000 3,000 (120,000) (50,000) (12,000) (10,000) $354,000

Required

a. What amount of ordinary business income is allocated to Jane?

b. What is the amount and character of separately stated items allocated to Jane?

c. What is Jane's basis in her XYZ corp. stock at the end of the year?

(a) $169,000 (b) The separated items are $8,000, $5000 and $3000 with the amount of $4,000, $2,500 and $1,500 respectively. (c) $217,000

Explanation:

Solution

(a) The ordinary business income allocated to Jane is given below:

Particulars Amount Jane allocation 50%

Overall net income for 2016 $354,000

Less:

Long term capital gains $8,000

Dividends $5,000

Tax exempt interest $3,000

Ordinary business income $338,000 $169,000

Therefore ordinary business income allocated to Jane = $169,000

(b) The amount and character of separately stated items allocated to Jane is given below:

Particulars Amount Jane allocation 50%

Separately stated items:

Long term capital gains $8,000 $4,000

Dividends $5,000 $2,500

Tax exempt interest $3,000 $1,500

(c) Jane's stock basis at the end of the year is given below:

Jane's stock basis at the end of the year = k + allocation (50%) + long term capital gains (50%) + dividends (50%) + tax exempt interest (50%))

= ($40,000+$169,000+$4,000+$2,500+$1,500)

= $217,000

Hence stock basis at the year end is $217,000