Reference no: EM132655094

Problem - a) Terry owns all of the stock of X. The stock's basis is $100. X has a total of current and accumulated earnings and profits of $50. X distributes $200 cash to Terry with respect to the stock. How is the $200 taxed? What is Terry's stock basis after the distribution? Would your answer be any different if X distributes to Terry, Terry's note to X for $200 borrowed from X?

For parts (b) and (c) assume that the stock of X is owned equally by two shareholders: Y Corporation and Terry, an individual. X and Y use the accrual method, Terry uses the cash method, and all use a calendar taxable year. Assume section 1059 does not apply. Use a 34% corporate tax rate in this problem. During the current year, X accrued income and expenses as follows:

Gross income from business $500

Dividends on AT&T stock 100

Interest on municipal bonds 100

Capital gain 100

$800

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

Non-capital expenses not deductible under section 162(e) (90)

Capital losses (146)

($666)

Net Income $134

b) On December 24 of the preceding year, Y and Terry incorporated X and capitalized X with cash of $100 each. On December 31 of that preceding year, Y and Terry received distributions from X of $5 each; X did not earn any income for that year. In addition, Y and Terry received distributions of $5 each, in the current year. Which distributions should be gross income to Y and Terry, in what amounts, and why? What does E&P have to do with this?

Alternatively, assume that Terry just bought the X shares on December 30 of the current year from another shareholder for FMV of $145, before the declaration and payment of a $5 distribution to Terry on December 31 of the current year. Should the distribution be taxable income to Terry? Why?

(c) Assume that Y's basis in its X stock is $100 and Terry's basis in his X stock is $40. On January 2 of the current taxable year, X distributes $100 in cash to Y and $100 in cash to Terry. As of the end of the preceding taxable year, X's accumulated E&P was zero. What are the tax consequences of this distribution to X, Y, and Terry?

(d) Terry, an individual, owns all of the stock of X, with a basis of $1 million. X owns $1 million cash and a hotel. X has $1 million of E&P. Blue wants to buy the stock of X for $5 million after X has distributed the cash, but will pay $6 million for the stock without a prior distribution to Terry. What should Terry want, and why? Assume that Terry is a corporation. What should Terry Corp want, and why?