A 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 A"with respect to his stock (i.e., as state law "dividend").
problem assumption: 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. 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 &243) $100
Interest on municipal bonds (&103) 100
Capital gain 100
Total $800
Deductible &162(a)(1) business expenses $430
Noncapital expense not deductible under & 162(e) $90
Capital losses (see &1211 (a) 146
Total $666
Net $134
Problem (9) Suppose that Y is an individual and X has always been an S corporation.
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.