Question

grady exchanges property with a basis of $12,000 and fair market value of $18,000 for 60% of the stock of eadie corporation. pedro acquired the other 40% of the stock five years ago. calculate grady's current income, gain, or loss and the basis he takes in his shares of eadie stock as a result of this transaction.

Answer 1

Grady's gain is $6000 and his stock basis is $18,000.

What is stock basis?

The initial capital contribution made to the S corporation or the initial cost of the stock purchased by the shareholder serves as the starting point for calculating stock basis. Based on the pass-through amounts from the S corporation, that sum is then raised or lowered. While a loss, deduction, or distribution will cause a decrease in stock basis, an income item will increase it. The stock basis is only reduced by non-dividend distributions; dividend distributions are not affected. The corporation is obligated to inform the shareholder of the amount of dividend and non-dividend distributions. Non-dividend payments make up the majority of distributions from an S corporation. A business that was a C corporation in the past or that acquired C corporation-related assets in a non-taxable transaction is eligible to distribute dividends.

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