Caravan Corporation has always been an S corporation. Caravan Corporation is 100% owned by Alan Merten. On January 1, Alan has an adjusted basis of $50,000 in his Caravan stock. During the year, Caravan reports ordinary income of $60,000, a long-term capital gain of $10,000, and a charitable contribution of $5,000. Alan receives a $20,000 cash distribution from Caravan on December 1. What income
does Alan recognize from the distribution, and what is his basis in the Caravan stock at year-end?
What will be an ideal response?
Basis = $50,000 + $60,000 + $10,000 - $5,000 - $20,000 = $95,000. The distribution is tax-free since the $115,000 predistribution basis exceeds the amount distributed.
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