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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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corporate taxation!

Customer Question

I have some study problems about Corporation taxation subject. Please let me know if you are interested. Prefer Tax attorney or Tax CPA!
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

Post the questions

Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Please let me know when you would be able to provide me the answers.

Thank you so much!
Customer: replied 11 years ago.
The problems are concerning Dividends and Other Nonliquidating Distributions. I need really detailed solutions, so I would know which code section to apply and the calculation processes. (ex. Code section and calculations) Please let me know when you would be able to provide me the answers. Thank you so much for your help!

(1)     A owns all of the stock of X. The stock¡¦s basis is $100. X has a total of current and accumulated earnings and profits of $50. X distributes $200 cash to A ¡§with respect to his stock¡¨ (i.e., as a state law ¡§dividend¡¨). How is the $200 taxed? What is A¡¦s stock basis after the distribution? Alternatively, X distributes to A A¡¦s note to X for $200 borrowed from X.
(2)     Assumptions: The stock of X is owned equally by two shareholders: Y (a corporation) and A (an individual). X and Y use the accrual method, A uses the cash method, and all use a calendar taxable year. Assume ¡± 1059 does not apply. Use a 34 percent corporate tax rate in the problem. During the current year, X accrued income and expenses as follows:

Gross income from business                  &nbs p;              $500
Dividends on AT&T stock (consider ¡± 243)           $100
Interest on municipal bonds (¡± 103)                   &n bsp;    100
Capital gain                   &n bsp;                   &n bsp;                   &n bsp; 100
Total                   & nbsp;                   & nbsp;                   & nbsp;           800

Deductible ¡± 162(a)(1) business expenses             430
Noncapital expenses not deductible under ¡± 162(e) 90
Capital losses (see ¡± 1211(a))                  &nbs p;               146
Total                   & nbsp;                   & nbsp;                   & nbsp;               666

Net                   &nb sp;                   &nb sp;                   &nb sp;              $134

On December 23 of the preceding year, Y and A incorporated X and capitalized X with cash of $100 each. On December 31 of that preceding year, Y and A received distributions from X of $5 each; X did not earn any income for that year. In addition, Y and A received distributions of $5 each, in the current year. Which distributions should be gross income to Y and A, in what amounts, and why? What does E&P have to do with this?

Alternative: A just bought the X shares on December 30 of the current year from another shareholder for FMV of $145, before the declaration and payment of a $5 distribution to A on December 31 of the current year. Should the distribution be taxable income to A? Why?

(3)     Now assume that Y¡¦s basis in its X stock is $100 and A¡¦s basis in his X stock is $40. On January 2 of the current taxable year, X distributes $100 in cash to Y and $100 in cash to A. As of the end of the preceding taxable year, X¡¦s accumulated E&P was zero. What are the tax consequences of this distributions to X, Y, and A? [hint: first compute X¡¦s current-year taxable income and then compute current-year E&P before reducing the E&P for the distribution (¡§interim E&P¡¨); after reducing for the distribution, compute final accumulated E&P.]

Variation: How much dividend would Y and the holders of A¡¦s shares receive if A¡¦s shares were owned by a different shareholder every quarter and $50 was distributed ratably to all shareholders quarterly?

(4)     Suppose under the basic facts in (3) above that X had an accumulated deficit of $100 in its E&P account as of December 31 of the preceding taxable year.
(5)     How would your answer to (3) above change if, on December 1 of the current year (the declaration date), X¡¦s board of directors voted to pay the $200 distribution by mailing the checks on December 31 of the current taxable year (the payment date, the identification of which is a practice generally used only by widely held corporation) to shareholders of record on December 15 of the current taxable year (the record date), such checks actually being received by Y and A in the mail on January 2 of the next year? Assume that Y and A are the public and that they are the only shareholders (as in the basic facts).
(6)     Who recognizes how much income and of what kind in (5) above if A sells his X stock to C for $540 (assume FMV) on December 10 of the current taxable year?

Alternative: What if Y sells its stock to Z on December 20 for $440?

(7)     A owns all of the stock of X, with a basis of $1 million. X owns $1 million cash and a hotel. X has $1 million of E&P. B wants to buy the stock of X for $5M after X has distributed the cash, but will pay $6 million for the stock without a prior distribution to A. What should A want, and why?

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