Question

As of January 1 of the current year, Kane owned all the 100 issued shares of Manning Corp., a calendar
year S corporation. On the 41st day of the year, Kane sold 25 of the Manning shares to Rodgers. For the
current year ended December 31 (a 365-day calendar year), Manning had $73,000 in nonseparately
stated income and made no distributions to its shareholders. What amount of nonseparately stated
income from Manning should be reported on Kane's current year tax return?
A. $56,750
B. $54,750
C. $16,250
D. $0

Answer 1

Answer:

A) $56,750

Explanation:

Since Manning's ownership changed during the year, it must allocate income differently for the first 40 days than the remaining 325.

Kane should report the following income:

• 100% income form Manning x 40/365 = $73,000 x 40/365 = $8,000
• 75% income from Manning x 325/365 = $73,000 x 75% x 325/365 = $48,750
• total income allocated to Kane = $8,000 + $48,750 = $56,750