Case Study: Tax Memo-Beta Corporation

To: File

From: Roger Chirino

Re: Tax Memo - Beta Corporation

Date: 4/10/2017

Facts

Juan Estefan first founded Beta Corporation on January 4th of the first year. Beta Corporation main operations are testing of software and games for other software companies. At inception, Estefan contributed $50,000 to fully own the business (100%). From commencement, Beta Corporation elected “S Corporation” tax status. During the same excat year it loaned $25,000 to a bank. Beta Corporation has in their first year an ordinary loss of $60,000 and in their second year had an ordinary loss of $20,000. Moreover, when June 30th of Year 2 came around, Juan and his wife divorced. Juan made a transfer of 50% to Martha, his former spouse, in accordance with the divorce settlement. In Year 3, Beta Corporation improved its performance incurring $40,000 of ordinary income.

Problem 1

How much of the ordinary loss in Year 1 can Juan Estefan report?

He can report $50,000 versus his stock basis and the excess will be a carryforward.

Analysis I

It is the shareholder’s accountabilities to find out his basis for a loss or deduction claimant. For Juan Estefan to claim a loss, he needs to somehow or someway show that he has sufficient stock or debt basis. Juan stock basis in year one is $50,000, since the bank loan of $20,000 was obtained through Beta Corporation not him. Per the Internal Revenue Code (IRC) Section 1366(d)(1) the combined amount of losses and deductions cannot exceed the sum of the adjusted basis of the shareholder’s stock and debt in the corporation. To explain, Juan stock basis in year one is $50,000 and ordinary loss is $60,000. He can report $50,000 of the ordinary loss against his stock