Question - Juan Estefan formed Beta Corporation on January 4th of Year 1, and the corporation immediately made an S election effective for that year. Beta Corporation is involved in the Beta testing of software and games for other software companies. In forming the corporation, Juan contributed $50,000 cash in exchange for 100% of the Beta Stock. Shortly thereafter, the corporation obtained a $25,000 bank loan to assist with operations. Beta's first two years did not go as well as expected, Beta incurred ordinary losses of $60,000 and $20,000, in years 1 and 2 respectively. In addition in Year 2 Juan and his wife Marta divorced. As part of the divorce settlement, on June 30th of Year 2, Juan gave Marta 50% of the Beta Stock. It is now the beginning of year 3, Beta's performance finally improved, with the corporation estimated to earn $40,000 of ordinary income. Juan asks your firm to help in determining the tax consequences of these events, particularly the usage of the S corporation losses, you will be meeting with him to discuss his options in a few weeks along with your manager.
Identify 3 tax issues.