Lamont is a 100 percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2019. During 2020, JKL distributed $20,000 to Lamont. During 2020, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2020 in each of the following scenarios?a. Lamont's stock basis at the beginning of 2020 was $30,000.b. Lamont's stock basis at the beginning of 2020 was $4,000.
What will be an ideal response?
Part a: Lamont does not recognize any gain on the distribution and his stock basis at the end of the year is $15,000 ($30,000 initial basis + $5,000 business income allocation ? $20,000 distribution).
Part b: Lamont recognizes $11,000 of long-term capital gain ($20,000 distribution ? $4,000 basis at beginning of year ? $5,000 income allocation). The distribution in excess of basis is a long-term capital gain because Lamont's stock in JKL is a capital asset and Lamont held the stock for more than a year. Lamont's stock basis at the end of the year is zero.
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