Question

TAX 502 - Lesson Assignment #6: Penalty Taxes on Undistributed Corporate Income, Dividends and Other Nonliquidating Distributions

Reading

Text: Study Chapters 7 and 8 of the Bittker & Eustice text.

Assignments

The following Assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response.

Copy the question, and then 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 major differences between computing current earnings and profits and current taxable income as well as why earnings and profits should be calculated before a corporation decides to make a distribution to its shareholders.

LESSON 6, PROBLEM #2

Allan owns all of the stock of CadyCo. The stock’s basis is $100,000. CadyCo has a total of current and accumulated earnings and profits of $50,000. CadyCo distributes $200,000 cash to Allan “with respect to his stock” (i.e., as a state law “dividend”). How is the $200,000 taxed? What is Allan’s stock basis after the distribution? Alternatively, CadyCo distributes to Allan his note to CadyCo for $200,000 borrowed from CadyCo.

LESSON 6, PROBLEM #3

Assumptions: The stock of ChadCo is owned equally by two shareholders: SecondCo (a corporation) and Arnold (an individual). ChadCo and SecondCo use the accrual method, Arnold uses the cash method. All use a calendar taxable year. Assume § 1059 does not apply. Use a 34 percent corporate tax rate in this problem. During the 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

On December 24 of the preceding year, SecondCo and Arnold incorporated ChadCo and capitalized ChadCo with cash of $100,000 each. On December 31 of that preceding year, SecondCo and Arnold received distributions from ChadCo of $5,000 each; ChadCo did not earn any income for that year. In addition, SecondCo and Arnold received distributions of $5,000 each, in the current year.

Which distributions should be gross income to SecondCo and Arnold, in what amounts, and why? What does E&P have to do with this?

Alternative: Arnold just bought the ChadCo shares on December 30 of the current year from another shareholder for FMV of $145,000, before the declaration and payment of a

$5,000 distribution to Arnold on December 31 of the current year.

Should the distribution be taxable income to Arnold? Why?

Now assume that SecondCo’s basis in its ChadCo stock is $100,000 and Arnold’s basis in his ChadCo stock is $40,000. On January 2 of the current taxable year, ChadCo distributes $100,000 in cash to SecondCo and $100,000 in cash to Arnold. As of the end of the preceding taxable year, ChadCo’s accumulated E&P was zero.

What are the tax consequences of this distribution to ChadCo, SecondCo, and Arnold? [Hint: First compute ChadCo’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: Assume Arnold’s shares were owned by a different shareholder every quarter and $50,000 was distributed ratably to all shareholders quarterly?

How much dividend would SecondCo and the holders of Arnold’s shares receive?

Suppose under the basic facts in (3) above that ChadCo had an accumulated deficit of

$100,000 in its E&P account as of December 31 of the preceding taxable year.

If, on December 1 of the current year (the declaration date), ChadCo’s board of directors voted to pay the $200,000 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 corporations) to shareholders of record on December l5 of the current taxable year (the record date), such checks actually being received by SecondCo and Arnold in the mail on January 2 of the next year? Assume that SecondCo and Arnold are the public and that they are the only shareholders (as in the basic facts).

How would your answer to (3) above change?

Suppose that SecondCo is an individual and that ChadCo has always been an S corporation.

What is ChadCo’s E&P‘? How is each shareholder’s personal income tax return affected for the current year by the tax items of ChadCo?   How will ChadCo distribution of

$100,000 to each shareholder in the current year affect shareholders?

Answer 1

ANSWER:-

Income, particularly held income, and benefit are regularly utilized as equivalent words in corporate back, despite the fact that they are distinctive terms and have diverse implications. These distinctions generally revolve around bookkeeping treatment.

Income versus Benefit :-

An organization's income are equivalent to incomes, short the expenses of generation over a given timeframe. Benefit is equivalent to add up to income less all costs. In the correct setting, these could be equivalent to each other, in spite of the fact that that is uncommon. An organization may have a considerable measure of income, yet have next to no benefit. Huge holes amongst income and benefits may be a sign the organization invests excessively energy and cash on ineffective exercises.

Consider a case where a toy maker offers $10,000 worth of toys in multi week. It didn't profit from different sources over that week, thus its aggregate income is $10,000.

On the off chance that it cost $7,000 to fabricate those toys, the income for the organization are $3,000 for the week, or $10,000 - $7,000. This does not consider other settled expenses, in any case. The organization may have paid enthusiasm on some obligation, needed to pay a bookkeeper or fix a latrine at its office. Assume the organization caused $1,800 worth of these overhead expensesduring the week. Presently, its week by week benefit is just $1,200 despite the fact that income demonstrate $3,000.

This advises the organization that it needs to center around decreasing random expenses. It is assembling and offering toys at a 30% edge, yet it needs to instantly sink an entire 60% of its profit into different costs.

Think about the implications of an organization (or financial specialist) that overlooks the contrast amongst income and benefit. On the off chance that the toys had just sold at a 15% edge rather than 30%, those different costs would have brought about a net misfortune for the week, yet income still demonstrated a $1,500 gain. This is an altogether different picture once the extra costs are calculated in.