Austin owns 100% of the stock
Austin owns 100% of the stock of MoJo Corp., which is a calendaryear S corporation. MoJo has been an S corp for 12 years, but was aC corp prior to that. At the beginning of 20×1, MoJo has anAccumulated Adjustments Account of $200,000 and AccumulatedEarnings and Profits from C-Corp years of $500,000. Austin has astock basis of $300,000 on January 1, 20×1. MoJo has income of $0in 20×1 ignoring any effect of distributions. MoJo distributesEvilacre, a plot of land held as an investment, to Austin during20x1. MoJo has a basis of $600,000 in Evilacre and Evilacre has afair market value of $800,000 on the date of distribution. What isAustin’s taxable income from these events (including any K1 incomepassing through to Austin)?
A. $200,000 capital gain; $400,000 dividend
B. $200,000 capital gain; $500,000 dividend
C. $500,000 dividend only
D. $500,000 capital gain only
E. None of the above answers are correct
Answer:
Answer : B. $200,000 capital gain; $500,000dividend
Note:
1. Calculation ofCapital Gain
Mojo’s basis in Evilace is$600,000
Fair market on the date ofdistribution is $800,000
· Capital Gain = Fair Market Value –Basis
= 800,000 – 600,000
= 200,000
The plot of land Evilace held as aninvestment in Austin during 20×1 andMojo is an S corporation during that period. Therefore notax effect is going too held. Austin is eligible for total part ofthe Capital Gain. ie. $ 200,000.
2. Dividend
Austin has a basis on Mojo as onJanuary 1, 20×1 (Mojo as a S Corporation) $ 300,000 and Mojo’saccumulated adjustment account is $ 200,000.
As per the problem mentioned Austinowns 100% of the stock of MoJo Corp as an S Corporation, same havebalance from C corporation $500,000
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