Brewster Corporation, a calendar year S corporation, has two unrelated shareholders each owning 50 percent of its stock. Howard has a stock basis of $68,400 as of January 1, 2019, and Amber has a stock basis of $90,713 as of the same date. Also, at the beginning of 2019, Brewster Corporation (which was previously a C corporation) has AAA of $51,930 and accumulated earnings and profits from when it was a C corporation of $87,480. During 2019, Brewster Corporation sold a building which it had used in its business since 2015 and in which it had an adjusted basis of $486,000 for a selling price of $656,100. Brewster Corporation then distributed the proceeds of this sale equally to its two shareholders. On January 1, 2016, the date Brewster Corporation’s S election took effect, the building was worth $583,200 and had an adjusted basis of $534,600. Assume that if Brewster Corporation were a C corporation in 2019, its taxable income would have been $218,700. During 2019, Brewster Corporation also has the following additional information:
– ordinary income from operations ………………………….. $243,000
– tax-exempt interest income……………………………………… 24,300
– short-term Capital loss …………………………………………… 13,680
– charitable contributions ………………………………………….. 16,380
Give the tax consequences of these transactions for Brewster Corporation and for each of its shareholders in 2019
1st Determine if there is a corporate level tax: here the built in gain tax applies
2nd List items passing through to shareholders, including ordinary operating income, STCL, TEI income, charitable contribution, and section 1231 gain on the sale of the building
3rd Account for pass throughs of income and gain and how those affect the corporation’s AAA account and each shareholder’s stock basis before accounting for the distributions.
4th Account for the distribution of half of the sales proceeds to each shareholder ($656,100/2=$328,050 to each shareholder) given that this S corporation does have accumulated E and P at the end of the tax year.
5th Determine if either shareholder has any remaining stock basis allowing them to deduct any losses and expenses passing through or whether the shareholder needs to carry those losses and expenses forward to future years.
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