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Thriller Corporation has one class of voting common stock, of which 1,000 shares are issued and...

Thriller Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Joe Jackson 400 Mike Jackson (Joe’s son) 200 Jane Jackson (Joe’s daughter) 200 Vinnie Price (unrelated) 200 Total 1,000 Thriller Corporation has current E&P of $300,000 for this year and accumulated E&P at January 1 of this year of $500,000. During this year, the corporation made the following distributions to its shareholders: 03/31: Paid a dividend of $10 per share to each shareholder ($10,000 in total). 06/30: Redeemed 200 shares of Joe’s stock for $200,000. Joe’s basis in the 200 shares redeemed was $100,000. 09/30: Redeemed 60 shares of Vinnie’s stock for $60,000. His basis in the 60 shares was $36,000. 12/31: Paid a dividend of $10/share to each shareholder ($7,400 in total).

a. Determine the tax status of each distribution made this year. (Hint: First, consider if the redemptions are treated as dividend distributions or exchanges.)

Treatment
dividend distribution on 03/31
Joe dividend distribution on 06/30
Vinnie exchange distribution on 09/30
dividend distribution on 12/31

b. Compute the corporation’s accumulated E&P at January 1 of next year. (Do not round intermediate calculations.)

I need just the answer to part B! Thanks!!

Solutions

Expert Solution

a)

Since CE&P of $300,000 exceeds total dividends distributed during the year, the $10,000 distribution on March 31 is a dividend. Also, since CE&P of $300,000 exceeds total dividends distributed during the year, the $7,400 distribution on December 31 is a dividend

Before the redemption, Joe is deemed to own 800 of the 1,000 (80%) shares of Thriller Corporation (400 directly and 200 each from Mike and Jane). After the redemption Joe is deemed to own 600 of the 800 (75%) remaining shares of Thriller Corporation (200 directly and 200 each from Mike and Jane). Joe fails the stock ownership tests because he still owns more than 50% of the stock. Therefore, the entire $200,000 received by Joe is treated as a dividend.

Before the redemption, Vinnie owns 200 of the remaining 800 (25%) shares of Thriller Corporation stock. After the redemption, Vinnie owns 140 of the 740 (18.9%) remaining shares of Thriller Corporation stock. Vinnie meets both the 50% and 80% tests (18.9% is lower than 50% and is lower than (80% 25%) = 20%). Vinnie treats the redemption as an exchange and reports a capital gain of $24,000 ($60,000 - $36,000).

b.

Compute the corporation’s accumulated E&P at January 1 of next year.Thriller Corporation first reduces its CE&P for the dividends paid during the current year:

formula spreadsheet


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