S-corp basis after purchased additional stocks
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Client owns 60% in an S-Corp, in 08 she bought the remaining stocks from her sister for 16K. At the sales date, the B/S shows capital of 175K and RE (loss)60K in otherwords, the original basis is 69K/46K. What is the new basis & effect to the B/S?
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Helpful Answer
AM is correct unless you mean by "she bought", the corporation bought the sister's stock. If I am reading the question correctly, the sister bought the stock personally. In which case there is not any effect at all on the balance sheet and her basis in the stock is her old basis plus the new purchase of 16K.
Answer
New basis is 60% of everything in the business at the time of the sale plus the 16K she
received from her sister. The sister's sale would be her 30% of the total business sold
for 16K. A lot of work to calculate inventories, supplies, etc,etc,etc
Answer
Since she bought the STOCK from her sister, how does this effect the b/s?
Solved!
AM is correct unless you mean by "she bought", the corporation bought the sister's stock. If I am reading the question correctly, the sister bought the stock personally. In which case there is not any effect at all on the balance sheet and her basis in the stock is her old basis plus the new purchase of 16K.
Answer
I believe what Charlotte is talking about is making a section 338 election to adjust basis of assets in corporation. This is usually a bunch of messy calculations, but it may help your client. Otherwise A.M. is correct to simply adjust outside basis upward by 16K.
Answer
Since I always try to K.I.S.S. a question, I think I responded in a round about way like IRMN said. She bought the stock, so now she owns 40% more stock with a $16K basis, plus she owns the other 60% as well.
And I do not understand the 69/46 basis. If the capital account is $175 and the AAA is -$60, then HER SHARE of the capital is $105 and her AAA is negative $36. Her sister's capital/AAA are $70/-$24. Not exactly the same as $69/$46, since capital stock on the b/s is not affected by AAA.
But sister's basis IS $46, since she contributed $70 for her stock. Her AAA was -$24, but she does not sell her AAA.
Anything else is tax advice, and my website is www.marltoncpa.com. I charge $150 an hour.
Comment
Thanks to all of you for your answers - I really appreciate it. Perhaps I should have made it clearer. The client bought stock from her sister, not the assets. There is no sec. 338 election as I believe Charotte may have assumed (TAXIOWA - I agree with you). I think sec. 338 is no longer available to be elected by an individual (only for corporations). This is a clean company with no loan either from outside or from shareholders. IRMN, thanks for your clear answer. AM you are right about there is no change in capital in B/S and AAA is negative will not be the same as the basis, however in this case the basis for both is 69K/46K. Again, I do very much appreciate all the answers.