(a) On July first of year two, X Corp., a calendar yeartaxpayer, made distributions of $20,000 to A, its sole shareholder,whose stock had a $5,000 basis. No other distributions were made inyear 2. As of December 31 of year one, X Corp. had no earnings andprofits. In year two, X Corp. had earnings and profits of $15,000as of July first, but only $5,000 for the entire year. Determinethe tax consequences in the following situation.
(b) Suppose in (a) that X Corp. had an accumulated earnings andprofits deficit of $15,000 as of December 31 of year one. Determinethe tax consequences in this situation.
(c) Suppose in (a) that X Corp. had an accumulated earnings andprofits of $15,000 as of December 31 of year one, and that in yeartwo, X Corp. had a $15,000 earnings and profits deficit on Julyfirst, but a $5,000 earnings and profits account for the entireyear. Determine the tax consequences in this situation.
(d) Suppose in (c) that X Corp. had $15,000 of current earningsand profits as of July first of year two, but a deficit of $20,000for the entire year.Determine the tax consequences in thissituation.
(a) On July first of year two, X Corp., a calendar yeartaxpayer, made distributions of $20,000 to A, its sole shareholder,whose stock had a $5,000 basis. No other distributions were made inyear 2. As of December 31 of year one, X Corp. had no earnings andprofits. In year two, X Corp. had earnings and profits of $15,000as of July first, but only $5,000 for the entire year. Determinethe tax consequences in the following situation.
(b) Suppose in (a) that X Corp. had an accumulated earnings andprofits deficit of $15,000 as of December 31 of year one. Determinethe tax consequences in this situation.
(c) Suppose in (a) that X Corp. had an accumulated earnings andprofits of $15,000 as of December 31 of year one, and that in yeartwo, X Corp. had a $15,000 earnings and profits deficit on Julyfirst, but a $5,000 earnings and profits account for the entireyear. Determine the tax consequences in this situation.
(d) Suppose in (c) that X Corp. had $15,000 of current earningsand profits as of July first of year two, but a deficit of $20,000for the entire year.Determine the tax consequences in thissituation.
Related questions
TAX 502 - LessonAssignment #6: Penalty Taxes onUndistributed Corporate Income, Dividendsand Other NonliquidatingDistributions
Reading
Text: StudyChapters 7 and 8 of the Bittker & Eustice text.
Assignments
The following Assignmentsshould be completed and submitted to the course faculty via thelearning platform for evaluation and grading. Submit your responsesto these questions in one WORD document. List the question first,and then your response.
Copy the question, andthen provide your answer on all of the following:
LESSON 6, PROBLEM#1
In not less than 1,000 words discuss"earnings and profits". Your discussion should include majordifferences between computing current earnings and profits andcurrent taxable income as well as why earnings and profits shouldbe calculated before a corporation decides to make a distributionto its shareholders.
LESSON 6, PROBLEM#2
Allan owns all of the stock of CadyCo.The stockâs basis is $100,000. CadyCo has a total of current andaccumulated earnings and profits of $50,000. CadyCo distributes$200,000 cash to Allan âwith respect to his stockâ (i.e., as astate law âdividendâ). How is the $200,000 taxed? What is Allanâsstock basis after the distribution? Alternatively, CadyCodistributes to Allan his note to CadyCo for $200,000 borrowed fromCadyCo.
LESSON 6, PROBLEM#3
Assumptions: The stock ofChadCo is owned equally by two shareholders: SecondCo (acorporation) and Arnold (an individual). ChadCo and SecondCo usethe accrual method, Arnold uses the cash method. All use a calendartaxable year. Assume § 1059 does not apply. Use a 34 percentcorporate tax rate in this problem. During the current year, ChadCoaccrued 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) businessexpenses | $430,000 |
Noncapital expenses not deductibleunder § 162(e) | 90,000 |
Capital losses (see § 1211(a)) | 146,000 |
Total | $666,000 |
Net | $134,000 |
On December 24 of the preceding year, SecondCo and Arnoldincorporated ChadCo and capitalized ChadCo with cash of $100,000each. On December 31 of that preceding year, SecondCo and Arnoldreceived distributions from ChadCo of $5,000 each; ChadCo did notearn any income for that year. In addition, SecondCo and Arnoldreceived distributions of $5,000 each, in the current year.
Which distributions should begross income to SecondCo and Arnold, in what amounts, and why? Whatdoes E&P have to do with this?
Alternative: Arnold just bought the ChadCo shares on December 30of the current year from another shareholder for FMV of $145,000,before the declaration and payment of a
$5,000 distribution to Arnold onDecember 31 of the current year.
Should the distribution be taxableincome to Arnold? Why?
Now assume that SecondCoâs basis in its ChadCo stock is $100,000and Arnoldâs 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, ChadCoâs accumulated E&P was zero.
What are the tax consequences ofthis distribution to ChadCo, SecondCo, and Arnold? [Hint: Firstcompute ChadCoâs current-year taxable income and then computecurrent- year E&P before reducing the E&P for thedistribution (âinterim E&Pâ); after reducing for thedistribution, compute final accumulated E&P.]
Variation: Assume Arnoldâs shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly?
How much dividend would SecondCoand the holders of Arnoldâs shares receive?
Suppose under the basic facts in (3) above that ChadCo had anaccumulated deï¬cit of
$100,000 in its E&P account as ofDecember 31 of the preceding taxable year.
If, on December 1 of the current year (the declaration date),ChadCoâs board of directors voted to pay the $200,000 distributionby mailing the checks on December 31 of the current taxable year(the payment date, the identiï¬cation of which is a practicegenerally used only by widely held corporations) to shareholders ofrecord on December l5 of the current taxable year (the recorddate), such checks actually being received by SecondCo and Arnoldin the mail on January 2 of the next year? Assume that SecondCo andArnold are the public and that they are the only shareholders (asin the basic facts).
How would your answer to (3) abovechange?
Suppose that SecondCo is an individual and that ChadCo hasalways been an S corporation.
What is ChadCoâs E&Pâ? How iseach shareholderâs personal income tax return affected for thecurrent year by the tax items of ChadCo? How willChadCo distribution of
$100,000 to each shareholder inthe current year affect shareholders?
