Exercise 4-24 (Algorithmic) (LO. 5)

On January 2, Chaz transfers cash of $118,200 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $29,550. The income is credited to its earnings and profits account. The corporation distributes $8,865 to Chaz.

If an amount is zero, enter "0".

a. How do Chaz and the corporation treat the $8,865 distribution? Chaz has a

return of capitaltaxable dividend

of $fill in the blank 2 and the corporation has a deduction of $fill in the blank 3.

b. Assume instead that Chaz transfers to the corporation cash of $59,100 for stock and cash of $59,100 for a note of the same amount. The note is payable in equal annual installments of $5,910 and bears interest at the rate of 6%. No distributions are made during the year to Chaz. However, at the end of the year, the corporation pays an amount to meet the loan obligation(i.e., the annual $5,910 principal payment plus the interest due).

Determine the total amount of the payment and its tax treatment to Chaz and the corporation.

The corporate payment to Chaz totals $fill in the blank 4. Chaz has interest of $fill in the blank 5 and a note repayment of $fill in the blank 6 of which $fill in the blank 7 is taxable to Chaz. The corporation has a deduction of $fill in the blank 8.