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Jack is the only shareholder of XYZ Corporation. At year-end, XYZ had $200 of current year...

Jack is the only shareholder of XYZ Corporation. At year-end, XYZ had $200 of current year earnings and profits and $600 of accumulated earnings and profits. If XYZ distributes cash of $200 to Jack, what is Jack’s tax liability on the dividend, if any? Assume Jack has a basis of $10 in XYZ shares. How does this result change if XYZ only has $50 of current earnings and profits and $100 of accumulated earnings and profits?

Clearly identify the requirements being addressed. Show all calculations within the cells of an Excel spreadsheet. This means that you must use formulas and links so that the thought process can be examined. Make effective use of comments to convey your thought process as well. No hard coding of solutions. Submit a single MS Excel file for grading.

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Ans.

Case 1.

In the fist case XYZ Corporation has sufficient earning and profits for the purpose of distribution to its shareholders.

Jack is the only shareholder of the XYZ Corporation, hence all the dividend will go to him. Jack will be taxable for all the amount of dividend received by him i.e. dividend of $200 will be Fully taxable in the hands of Jack.

Tax Liability in the hands of Jack will be = $ 200 dividend x Applicable tax rate

Case 2.

In the Second case XYZ Corporation has only $150 ($50 +$100) of earnings and profit for distribution purpose. In this case company XYZ corporation distribute $200 to Mr. Jack. Mr. Jack holds $ 10 Basis in the company shareholding.

This means if company distributes $200 to Mr. Jack then it will be bifucated as under :-

distributed as Dividend = $ 150

distributed as Capital repayment = $ 10

distributed as capital gain = $200 minus $ 150 minus $ 10 = $ 40

ekkarill92 answered 3 months ago
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