Amos and Thomas form the Show Corporation during the current year. Amos owns 40% of Show's stock, Thomas owns 20%, and Arthur owns the remaining 40%. Amos paid $50,000 for his interest, and Thomas paid $25,000. Amos and Thomas are responsible for Show's daily operations and serve as co-chief executive officers. During the current year, Show Corporation has an operating income of $60,000 and pays out $10,000 in dividends. Determine Amos's and Thomas's adjusted bases in the Show Corporation stock based on the type of entity described.

A. Amos's basis is $50,000

and Thomas's is $25,000

B. Adjusted basis - End of year $ 70,000 $ 35,000

Explanation:

A. Show Corporation as a corporation.

Show Corporation is a separate taxable entity. The $60,000 operating income is taxed using the corporate tax rate schedule.

The Show corporation's tax liability is $10,000 [$7,500 + ($60,000 - $50,000

= $10,000 x 25%) ].

Amos reports $4,000 ($10,000 x 40%) and

Thomas reports $2,000 ($10,000 x 20%) of dividend income.

Therefore neither the taxable income reported by Show nor the dividends paid affects a shareholder's basis.

Amos's basis is $50,000

and Thomas's is $25,000.

b. Show Corporation as an S corporation.

Amos and Thomas's basis at the end of the current year:

Amos Thomas

Original investment - At cost $ 50,000 $ 25,000

Add: Additional investment

Share of income Amos $60,000 x 40% 24,000

Thomas $60,000 x 20% 12,000

Less: Recoveries of capital

Dividends received (4,000) (2,000)

Adjusted basis - End of year $ 70,000 $ 35,000