Question

ACCT 630, Advanced Corporate Taxation , ACCT630-01

PROJECT – S CORPORATIONS

(1) Your assignment is to calculate the answers for Problem 5A(9) of the Study Problems as set forth below.

(3) Check figures:

(a) Addition to each shareholder’s stock basis 67

(b) Addition to each shareholder’s AAA 17

(4) Problem

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.) X has always been an S corporation.

During the current year, X accrued income and expense as follows:

Gross income from business $500

Dividends on AT&T (consider section 243) $100

Interest on municipal bonds (section 103) $100

Capital gain 100

Total $800

Deductible section 162(a)(1) business expenses $430

Noncapital expense not deductible under section 162(e) $90

Capital losses (see section1211 (a) $146

Total $134

(a) What is X’s E&P?

(b) How much is each shareholder’s personal income tax return affected for the current year by the tax items of X? (Show any S level taxes, separately computed income items for each shareholder, and nonseparately computed income for each shareholder.)

(c) 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.)

(d) 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. (1) 1374 tax, (2) 1375 tax (calculate excess passive income) and consequences, and (3) AAA and E&P and basis. HINTS: B&E apparently treats tax exempt income as included in passive income and gross income. There is likely administrative authority concerning the applicability of the 1375 tax in a year in which a distribution occurs.

Answer 1

Computation of E&P
Particulars	Amount
Business Income	$500
Dividend	$100
Interest on bonds	$100
Capital gain	$100
Total income	$800
Less: Expenses ($430+$90+$146)	$666
Profit before tax	$134
less: tax @34%	$91.80
E&P	$42.20

Working note:

Calculation of tax

Profit befor Tax $134

Add:Nondeductible expenses $90

Add: Capital loss $146

Less: Capital loss allowed $100

Taxabli income $270

Tax @34% $91.80

Note: Capital loss are allowable to the extent of capital gain. Thus $46 of unexhausted capital oss is been added back.