Question

Assumptions: Use a flat corporate tax rate of 21% for all problems. Assume a tax rate...

Assumptions:

Use a flat corporate tax rate of 21% for all problems. Assume a tax rate of 15% for all dividends and capital gains.

Assume there is no Alternative Minimum Tax for these problems.

Assume that all entities are US domestic corporations, taxed under Subchapter C of the IRC unless otherwise noted.

the internal revenue code.

Question 1, 50 Points

Ocean Corporation has two equal shareholders - Moana and Maui. At January 1 2018

Moana and Maui each have a basis in the corporation of $100,000. During 2018

Ocean Corporation had the following items of income (before considering any distributions):

Gross Receipts 200,000

Non-deductible expenses (30,000)

Other operating expenses (100,000) (Assume all deductible)

Book Income 70,000

On March 1, Ocean Corporation distributed cash of $50,000 to each Moana and Maui (total distributions of $100,000).

On June 1 Moana sold all her stock in Ocean Corporation to Pua for $200,000. On September 1 Maui

Corporation made another cash distribution of $50,000 to Pua and distributed property to Maui with a fair market

value (FMV) of $50,000, and a basis of $40,000 (total FMV of all September 1 distributions was $100,000).

At January 1, 2018, Ocean corporation had $100,000 in accumulated earnings and profits.

Questions:

A What is Ocean's taxable income for 2018?

B What is Ocean's current earnings and profits for 2018?

C What are the tax consequences to Moana as a result of the March 1 distribution?

D What are the tax consequences to Moana as a result of the June 1 sale?

E What are the tax consequences to Maui as a result of the September 1 distribution?

F What are the tax consequences to Pua as a result of the September 1 distribution?

G What is Ocean's accumulated earnings and profits at January 1, 2019?

Business   Accounting   
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Homework Answers

Answer #1

Answer part A

Ocean's taxable income for 2018
Particulars $
Gross Receipts 200000
Other operating expenses 100000
Taxable income 100000

Answer part B

Tax calculation
Particulars $
Gross Receipts 200000
Other operating expenses 100000
Taxable income 100000
Tax on income @ 21% 21000
Profits after tax

79000
Book profits calculation
Particulars $
Gross Receipts 200000
Non deductible expenses 30000
Other operating expenses 100000
Book profits 70000
Tax for the year 21000
Book profits after tax 49000

Answer part G

Retained earnings of Ocean Corporation as on 1st January 2019
Particulars $
Retained earnings as on 1st January 2018 100000
Add: Profits after tax in the current year 49000
Less: Distributions made during the year 100000
Retained earnings as on 1st January 2019 49000
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