The stock of X is owned equally by two shareholders: Y (an individual with a sto
ID: 2711310 • 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. How will X’s distribution of $100 to each shareholder in the current year affect the shareholders? (Show a complete calculation of basis and the effect of the distribution for each shareholder.noted: addition to each shareholder's stock basis is 67)
Please show your 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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