Question

Vogel, Inc., an S corporation for five years, distributes a tract of land held as an investment to Jamari, its majority shareholder. The land was purchased for $68,400 ten years ago and is currently worth $171,000.

If an amount is zero, enter, "0".
a. As a result of the distribution, what is Vogel's recognized capital gain? How much is reported as a distribution to shareholders?
Vogel recognizes a capital gain of $ which is reported on Schedule K, and a proportionate share of it passes through to the shareholders . Jamari would take a $ basis in the land.
b. What is the net effect of the distribution on Vogel's AAA?
There is a net decrease of $ on Vogel's AAA.
c. Assume instead that the land had been purchased for $171,000 and was currently worth $68,400. How much would Vogel recognize as a loss? What would be the net effect on Vogel's AAA? What would be Jamari's basis in the land?
Vogel recognizes a loss $ and the net effect on Vogel's AAA is a decrease of $. Jamari would take a $ basis in the land.

Answer 1

Vogel, Inc. has a recognized capital gain of $102,600 due to property distribution to shareholder Jamari, affecting the AAA by the same amount. If the property had been distributed at a loss, there would be no recognition of loss and no effect on AAA.

Vogel, Inc. recognizes a capital gain of $102,600, which is reported on Schedule K, and the same amount is reported as a distribution to shareholders. The net decrease on Vogel's AAA is also $102,600.

The capital gain for Vogel, Inc. is calculated by subtracting the original purchase price of the land ($68,400) from its current value ($171,000), resulting in a gain of $102,600. This amount is both recognized as a gain on Vogel's financials and reported as a distribution to shareholders. For the shareholder, Jamari, the basis in the land would also be $171,000, which is the fair market value at the time of distribution. If instead the land had been purchased for $171,000 and was currently worth $68,400, Vogel would recognize no loss because losses on distributions of property are not recognized by S corporations. The AAA (accumulated adjustments account) would not change, and Jamari's basis in the land would be $68,400.

For S corporations, capital gains on distributions are recognized and affect the AAA accordingly, while capital losses on property distributions do not result in an AAA adjustment or loss recognition.