Acme Inc. (a C corporation) has a long history of operating losses with a deficit of $50,000 in its accumulated earnings and profits at the start of 2017. Acme has only one clas of stock. Acme’s sole shareholder is Sam. Sam’s basis in his Acme stock at the start of 2016 is $250,000.
On February 1, 2017, Acme distributes to Sam Blackacre, a parcel of real property that Acme has been using in its business. On the date of the distribution, and throughout 2016, Blackacre has a fair market value of $500,000, but it is encumbered by a mortgage securing a loan with an outstanding principal balance of $100,000, so that Acme’s “equity” in Blackacre is $400,000. Acme’s adjusted basis in Blackacre immediately before the distribution is $200,000. Sam takes Blackacre subject to the mortgage. Company makes no other distributions with respect to its stock during the year.
For 2017, not taking into account the transaction involving Blackacre, Acme has gross income of $200,000 and deductions of $180,000, for taxable income of $20,000.
1. What are the tax consequences to Acme and Sam for each of the transactions just described above?
2. What would have been the consequence of each of the transactions if Acme had validly elected S Corp status effective January 1, 2017?