Thriller Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:
Joe Jackson ......................................... 400
Mike Jackson (Joe's son).......................... 200
Jane Jackson (Joe's daughter)...................... 200
Vinnie Price (unrelated)........................... 200
Total ................................................. 1,000
Thriller Corporation has current E&P of $300,000 for this year and accumulated E&P at January 1 of this year of $500,000.
During this year, the corporation made the following distributions to its shareholders:
03/31:Paid a "dividend" of $10/share to each shareholder ($10,000 in total).
06/30:Redeemed 200 shares of Joe's stock for $200,000. Joe's basis in the 200 shares redeemed was $100,000.
09/30:Redeemed 60 shares of Vinnie's stock for $60,000. His basis in the 60 shares was $36,000.
12/31:Paid a dividend of $10/share to each shareholder ($7,400 in total).
a. Determine the tax status of each distribution made this year.
b. Compute the corporation's accumulated E&P at January 1 of next year.
c. Joe is considering retirement and would like to have the corporation redeem all of his shares for $100,000 plus a 10-year note with a fair market value of $300,000.
1. What must Joe do or consider if he wants to ensure that the redemption will be treated as an exchange.
2. Could Joe still act as a consultant to the company?
d. Thriller Corporation must pay attorney's fees of $5,000 to facilitate the stock redemptions. Is this fee deductible?