Final answer:
An S corporation shareholder's initial basis in their stock is equal to the stock's Adjusted Basis, usually the investment and loans they provide to the corporation for stock. The initial basis is not linked to Fair Market Value, Par Value, or Original Issue Price. Shareholders earn returns through dividends or capital gains.
Step-by-step explanation:
For a shareholder in an S corporation, the initial basis of their stock is not determined by the stock's Fair Market Value, Par Value, or Original Issue Price. Instead, it's based on the stock's Adjusted Basis, which is typically the amount of money a shareholder contributes to the corporation in exchange for their stock plus any amounts loaned directly to the corporation.
When a corporation issues stock for the first time in an Initial Public Offering (IPO), it generates financial capital, but subsequent transactions between shareholders do not affect the corporation's capital. Shareholders can earn a return on their investment through dividends or capital gains; the former is a direct payment, while the latter is the increase in the stock's value between purchase and sale.