Monsters, Inc. has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

Vincent Price 400

Bela Lugosi (Vinnie’s dad) 175

Boris Karloff (Vinnie’s cousin) 150

Lon Chaney (Vinnie’s grandfather, no relation to Bela) 150

Faye Wray (Vinnie’s daughter) 125

Total 1,000

Monsters, Inc. has revenue of $510,000, including dividends from a 10% owned company of $10,000 and tax exempt interest income of $3000. Monsters also has ordinary business expenses of $200,000 (including Life Insurance premiums for employee owned policies of $8,000, life insurance premiums on officer’s lives with the company as the beneficiary of $5,000, interest on a loan to purchase a tax exempt bond of $1,500); additionally they have a DPAD of $5,000 for 2016. Also, the company donated $50,000 to the Alzheimer’s Association in 2016, utilized a $10,000 NOL carryover and had no NOL or capital loss carrybacks. Monsters, Inc, has accumulated E&P at January 1, 2016 of $500,000. During 2016, the corporation made the following distributions to its shareholders: 03/31: Paid a “dividend” of $11/share to each shareholder ($11,000 in total). 06/30: Redeemed 210 shares of Vinnie’s stock for $210,000. Vinnie’s basis in the 210 shares redeemed was $175,000. Each of his shares had the same basis. 10/31: Redeemed 80 shares of Boris’s stock for $40,000. His basis in the 80 shares was $30,000. Each of his shares had the same basis. 12/31: Paid a dividend of $10/share to each shareholder.

a. Determine book income and determine taxable income using Form 1120 page 1 and Schedule M 1 to show your work, in addition to any other workpapers required.

b. Determine the tax status of each distribution made during 2016 and the tax treatment required by each shareholder.

c. What is Vincent Price’s basis in his remaining stock?

d. What is Boris Karloff’s basis in his remaining stock?

e. What is accumulated E&P at December 31, after the last distribution of the year?

Answer rating: 100% (QA)

To determine the earnings for Monsters Incs books start with earnings of 510000 and deduct 200000 of regular business expenses including a 5000 DPAD This gives a book income of 310000 To determine you... View the full answer