CSU, Inc., is a calendar year S corporation. CSU’s Form 1120S shows nonseparately stated ordinary income of $120,000 for the year. Taewon owns 30% of the CSU stock throughout the year. The following information is obtained from the corporate records.
Tax-exempt interest income $ 4,500
Salary paid to Taewon (78,000)
Charitable contributions (9,000)
Dividends received from a non-U.S. corporation 7,500
Short-term capital loss (9,000) Depreciation recapture income 16,500
Refund of prior state income taxes 7,500
Cost of goods sold ($108,000)
Long-term capital loss (10,500)
Administrative expenses (27,000)
Long-term capital gain 21,000
elling expenses (16,500)
Taewon’s beginning stock basis 48,000
Taewon’s additional stock purchases 13,500
Beginning AAA 46,500
Taewon’s loan to corporation 30,000
1. Compute CSU’s taxable income or loss, showing the calculation (on a “white paper” schedule not on IRS forms). Taxable income should equal Form 1120S, Schedule K, line 18, which should be the same as Form 1120S, Schedule M-1, line 8. Assume the I.R.C. section 1374 and 1375 taxes do not apply. HINT: the refund of prior state income taxes is taxable other income. TI check figure $127,500.
2. Compute Taewon’s stock basis, showing the calculation, before any distribution. Taewon’s ending stock basis check figure before any distribution $101,100.
3. Calculate CSU’s ending AAA balance, showing the calculation, before any distribution.
4. Assume all facts remain the same and CSU distributes $400,000 total during the tax year to all shareholders proportionately. Show the effect, if any, of the distribution on Taewon’s stock basis and ending AAA.
5. Assume all facts remain the same and CSU had previously been a C corporation and had 60,000 of E&P. Show the effect, if any, of the distribution on Taewon’s stock basis, ending AAA, ending E&P. Show also the taxability, if any, of the distribution to Taewon. HINT: calculate the allocation of AAA to Taewon for distribution computations, even though AAA is a corporate account.
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