Question

ssumptions: The stock of ChadCo is owned equally by twoshareholders: SecondCo (a corporation) and Arnold (an individual).ChadCo and SecondCo use the accrual method, Arnold uses the cashmethod. All use a calendar taxable year. Assume § 1059 does notapply. Use a 34 percent corporate tax rate in this problem. Duringthe current year, ChadCo accrued income and expenses as follows:Gross income from business $500,000 Dividends on AT&T stock(consider § 243) 100,000 Interest on municipal bonds (§ 103)100,000 Capital gain 100,000 Total $800,000 Deductible § 162(a)(l)business expenses $430,000 Noncapital expenses not deductible under§ 162(e) 90,000 Capital losses (see § 1211(a)) 146,000 Total$666,000 Net $134,000 (1) On December 24 of the preceding year,SecondCo and Arnold incorporated ChadCo and capitalized ChadCo withcash of $100,000 each. On December 31 of that preceding year,SecondCo and Arnold received distributions from ChadCo of $5,000each; ChadCo did not earn any income for that year. In addition,SecondCo and Arnold received distributions of $5,000 each, in thecurrent year. Which distributions should be gross income toSecondCo and Arnold, in what amounts, and why? What does E&Phave to do with this? (2) Alternative: Arnold just bought theChadCo shares on December 30 of the current year from anothershareholder for FMV of $145,000, before the declaration and paymentof a $5,000 distribution to Arnold on December 31 of the currentyear. Should the distribution be taxable income to Arnold? Why? (3)Now assume that SecondCo’s basis in its ChadCo stock is $100,000and Arnold’s basis in his ChadCo stock is $40,000. On January 2 ofthe current taxable year, ChadCo distributes $100,000 in cash toSecondCo and $100,000 in cash to Arnold. As of the end of thepreceding taxable year, ChadCo’s accumulated E&P was zero. Whatare the tax consequences of this distribution to ChadCo, SecondCo,and Arnold? [Hint: First compute ChadCo’s current-year taxableincome and then compute current-year E&P before reducing theE&P for the distribution (“interim E&P”); after reducingfor the distribution, compute final accumulated E&P.] (4)Variation: Assume Arnold’s shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly? How much dividend would SecondCo andthe holders of Arnold’s shares receive? (5) Suppose under the basicfacts in (3) above that ChadCo had an accumulated deficit of$100,000 in its E&P account as of December 31 of the precedingtaxable year. (6) If, on December 1 of the current year (thedeclaration date), ChadCo’s board of directors voted to pay the$200,000 distribution by mailing the checks on December 31 of thecurrent taxable year (the payment date, the identification of whichis a practice generally used only by widely held corporations) toshareholders of record on December l5 of the current taxable year(the record date), such checks actually being received by SecondCoand Arnold in the mail on January 2 of the next year? Assume thatSecondCo and Arnold are the public and that they are the onlyshareholders (as in the basic facts). How would your answer to (3)above change? (7) Suppose that SecondCo is an individual and thatChadCo has always been an S corporation. What is ChadCo’s E&P‘?How is each shareholder’s personal income tax return affected forthe current year by the tax items of ChadCo? How will ChadCodistribution of $100,000 to each shareholder in the current yearaffect shareholders?