# 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 : 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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