02 Jan Using the following partial

Shawn Bernoulli formed Bernoulli Air Corporation on January 3 and immediately made the S election effective for year one. Shawn contributed $50,000 in cash in exchange for 100% of Bernoulli Air’s stock. The corporation also obtained a bank loan for $75,000 to help finance operations. As is common with new businesses, Bernoulli Air had an ordinary loss of $60,000 in year 1 and $12,000 ordinary loss for year 2. Additionally in year two, Shawn and his wife Jana divorced and as part of the divorce settlement on March 31 of Year 2, Shawn gave Jana 50% of the Bernoulli Air stock. In the third year, business operations did much better. The corporation had earnings of $40,000 ordinary income.

Using the following partial list of research sources, help Shawn determine the tax consequences of these events, in particular, the usage of the S corporation losses.

IRC Sec. 1366
Reg. Sec. 1.1366-2
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