On January 1, Year 1, Ginger, an individual, paid $27,000 for 7 percent of the stock in Root Corp., an S corporation. In November Year 1, he loaned $9,000 to Root Corp. in return for a promissory note. Root Corp. generated a $720,000 operating loss in Year 1. Root Corp. generated $420,000 ordinary business income in Year 2.
Required:
How much of Ginger’s share of this income is included in his Year 2 taxable income?
Compute Ginger’s basis in his Root Corp. stock and his Root Corp. note at the end of Year 2.
How would your answers to parts a and b change if Root Corp.’s ordinary business income was only $232,000?
