Reference no: EM132782506

Problem -

a. Marsha is a shareholder in a calendar year S corporation. At the beginning of the year, her stock basis is $20,000, her share of AAA is $4,000, and her share of corporate AEP is $10,000. She receives a $12,000 distribution, and her share of S corporation items includes a $4,000 long-term capital gain and $18,000 ordinary loss. Determine the effects of these events on AAA, stock basis, and AEP.

b. Jacob is a 50% shareholder in Babylon Corporation which is an S corporation. The S corporation had a $40,000 ordinary loss last year and $5,000 of ordinary income this year. Before accounting for last year's losses, Jacob's basis in his Babylon stock is $16,000 and Babylon owed Jacob $2,000 (an unsecured note having a basis of $2,000) at the end of last year. In addition, Babylon had $50,000 of other liabilities owed to creditors other than Jacob at the end of last year. What income and loss must Jacob report on his current return as a result of owning the Babylon stock (ignoring the at-risk and passive activity limitations)?