The stock of X is owned equally by two shareholders: Y (an individual with a sto
ID: 2453642 • Letter: T
Question
The stock of X is owned equally by two shareholders: Y (an individual with a stock basis of $100) and A (an individual with a stock basis of $40). X uses the accrual method, A and Y use the cash method, and all use the calendar year. (Assume 1059 does not apply.) Use a 34 percent corporate tax rate in this problem During the current year, X accrued income and expense as set forth :
Gross income from business $500
Dividends on AT&T stock (consider section 243) $100
Interest on municipal bonds (section103) $100
Capital gain $100
Total $800
Deducible section162 (a)(1) business expenses $430
Noncapital expenses not deductible under section162 (e) $90
Capital losses (section1211 (a)) $146
Total $666
Net $134. X has always been an S corporation. Alternatively, X has E&P of $100 from years before it was an S corporation and nothing in its AAA from prior S years. The $100 is capital gain from the sale of stock held for investment and the $500 gross income from business is also gross receipts from business. Assume the stock for investment was acquired while an S corporation. Assume other facts remaining the same including the $100 distribution to each shareholder. Discuss the following, showing calculations where appropriate. AAA and E&P and basis.( Addition to each shareholder's stock basis is 67 and Addition to each shareholder's AAA is 17). Please show you calculation step by step. Thank you.
Explanation / Answer
STOCK BASIS OF Y=$100
STOCK BASIS OF A=$40
TAX RATE=34%
CALCULATION OF TAXABLE INCOME OF X
GROSS INCOME FROM BUSINESS=$500
LESS BUSINESS EXPENSE=$430
NET BUSINESS INCOME=$70
CAPITAL GAIN=$100
CAPITAL LOSS=$146
NET CAPITAL GAIN=0
INCOME FROM OTHER SOURCE:
DIVIDENDS ON AT&T STOCK=$100
LESS :DEDUCTION U/S 243@70%=$(70)
INTEREST ON MUNICIPAL BONDS=$100
TOTAL INCOME FROM OTHER SOURCE=$130
GROSS TOTAL INCOME=$70+$130=$200
INCOME TO BE DIVIDED AMONG Y AND A=$200/2=$100 EACH
X'S DISTRIBUTION OF $100 TO EACH SHAREHOLDER IN THE CURRENT YEAR WOULD BE TAXABLE IN THE HANDS OF A AND Y
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