Chapter 12 Homework

4. Which of the following can be shareholders of an S corporation?

D. One-member limited liability company.
10. Collette’s S corporation holds a small amount of accumulated earnings and
profits (AEP), thereby requiring the use of a more complex set of distribution
rules. Collette’s accountant tells her that this AEP forces the maintenance of
the AAA figure each year. Discuss the issues that arise with respect to distributions
when an S corporation holds AEP.
an AEP = a more complex capital structure
First, you must maintain three accounts: AAA, AEP, and OAA. If anything from AEP will be taxed
as a dividend at dividend rates. Also, you can choose a bypass election and distribute out of AEP
first
Finally, AEP does not change until distribution
12.For each of the following independent statements, indicate whether the transaction
will increase (1), decrease (2), or have no effect (NE) on the basis of
a. Expenses related to tax-exempt income. decrease
b. Short-term capital gain. increase
c. Nonseparately computed loss. decrease
d. Section 1231 gain. increase
e. Depletion not in excess of basis. decrease
f. Separately computed income. increase
g. Nontaxable return-of-capital distribution by the corporation. decrease
h. Advertising expenses. decrease
i. Business gifts in excess of $25. decrease
j. Depreciation recapture income. increase
k. Dividend income received by the S corporation. increase
l. LIFO recapture tax paid. decrease
m. Collection of a bad debt previously deducted. increase
n. Long-term capital loss. decrease
o. Cash distribution to shareholder out of AAA. Decrease

27. Mary is a shareholder in Carroll Co, a calendar year S corporation. At the

beginning of the year, her stock basis is $10,000, her share of the AAA
is $2,000, and her share of corporate AEP is $6,000.
At the end of the year, Mary receives from Carroll Co a $6,000 cash distribution. Mary’s
share of S corporation items includes a $2,000 long-term capital gain and a $10,000
ordinary loss. Determine the effects of these events on Mary’s share of the entity’s AAA,
her stock basis, and Carroll Co’s AEP using spreadsheet software such as Microsoft Excel.
Chapter 12 Homework

The effects of events on Mary’s share of the entity’s AAA, her stock basis, and Carroll Co’s
AEP:

AAA Stock basis AEP

Beginning balance $2,000 $10,000 $6,000

Distribution ($2,000) ($2,000) ($4,000)

Balance $0 $8,000 $2,000

Long term capital gains $2,000 $2,000 $0

Balance $2,000 $10,000 $2,000

Loss ($10,000) ($10,000) $0

Ending balance ($8,000) $0 $2,000

Furthermore, the effects of events on Mary’s share of the entity’s AAA is on loss of $10,000,
on her stock basis no loss or no profit and Carroll Co’s AEP is on profit of $2,000