Discussion:
Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Abigail and Bobby actively participate in running the company, claudia has a separate day job and is a passive owner. Consider the following information for 2012:
• As of January 1, 2012 Abigail, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and debt basis of $0. On January 1, the stock basis is also the at-risk amount for each shareholder.
• Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2012. Neither has any other source of passive income (besides Lafter, for Claudia).
• On March 31, 2012 Abigail leands $5,000 of her own money to Lafter.
• Anticipating the need for basis to deduct a loss, on April 4, 2012, Bobby takes out a $10,000 loan to make a $10,000 contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as collateral.
• Later has an accumulated adjustments account balance of $45,000 as of January 1, 2012
• Lafter has C corporation earnings and profits of $15,000 as of January 1, 2012
During 2013, Lafter made several changes to its business approach and reported $18,000 of business income, computed as follows:
Sales revenue $208,000
Cost of goods sold (90,000)
Salary to Abigail (45,000)
Salary to Bobby (45,000)
Marketing expense (10,000)
Business income $18,000
• Lafter also reported a lontg-term capital gain of $24,000 in 2013.
• Lafter made a cash distribution on July 1, 2013 of $20,000 to each shareholder.
b. What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2013?