Eloise contributes $40,000 to a business entity in exchange for a 30% ownership interest. During the first year of operations, the entity earns a profit of $200,000. At the end of that year, the entity has liabilities of $75,000.
a. Calculate Eloise’s basis for her stock if the entity is a C corporation.
b. Calculate Eloise’s basis for her stock if the entity is an S corporation.
c. Calculate Eloise’s basis for her partnership interest if the entity is a partnership.
Swan, Inc., a C corporation, is owned by Abner (70%) and Fran (30%). Abner is the president, and Fran is the vice president for sales. Swan, Abner, and Fran are cash basis taxpayers. Late in 2009, Swan encounters working capital difficulties. Therefore, Abner loans the corporation $560,000 and Fran loans the corporation $240,000. Each loan uses a 5% note that is due in five years with interest payable annually.
a. Determine the tax consequences to Swan, Abner, and Fran for 2010 if the notes are classified as debt.
b. Determine the tax consequences to Swan, Abner, and Fran for 2010 if the notes are classified as equity.
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