Taxes Current Issues

Seminar on Taxes Current issues
Chapter 19
Answer to Question No 1:
Taxable income rose in 2016
Taxable income is being decreased
Taxable revenue is raised
Taxable income is being decreased
Taxable income is being decreased
Taxable revenue is raised
Answer to Question No 2:
When making corporate distributions, where the cumulative E&P has a deficit and the existing E&P has a positive number, the distribution is made from the current E&P.
When making corporate dividends, if the current E&P has a deficit and the cumulative E&P has a positive number, both are net on the day of distribution; if the outcome is a 0 or a negative value, then the distribution is a return on cash, otherwise the dividend will be paid out. c. In making corporate distributions, if both the current and accumulated E&P have a deficit, return of capital comes into play to the extent to shareholder’s basis of stock. A capital gain occurs in case of excess.
d. In making corporate distributions, current E&P gets preference over accumulated E&P, if both of them have positive balance.
Answer to question number 3:
In making corporate distributions, if the accumulated E&P has a deficit and current E&P has a positive amount, the distribution is made from the current E&P. If the current E&P has a deficit and accumulated E&P has a positive amount, both of them are netted on the day of distribution; if the result is a 0 or negative value then the distribution is a return of capital otherwise it is made of dividend equal to the value of the balance. If both the current and accumulated E&P have a deficit, return of capital comes into play to the extent to shareholder’s basis of stock. A capital gain occurs in case of excess. If current E&P gets preference over accumulated E&P, if both of them have positive balance.
Answer to question number 10:
Being the employee to Toucan Corporation, Samantha cannot enjoy any interest free loan free of tax because all interest free loan to corporate employee is taxable. Therefore, the $85,000 interest free loan of Samantha will be taxed as per market rate and considered to be a compensation to her.
Answer to question number 11:
a. All factors that applies to shareholder-employee case should be applied in case of employer being related to the shareholder-employer.
b. The relevance of the college degree to the responsibility and work of the employee will be investigated and compensation will be made accordingly.
c. The existence of another 40-hour per week job indicates that the shareholder-employee is working at another full-time job. Obviously, he is being overpaid.
d. A part of current pay may be considered to be the compensation for the past service rendered during the formative period of the corporation.
e. There might have a constructive dividend.
f. The disproportionately larger bonus paid to employees is subject to ill treatment by constructive dividend.
Answer to question number 12:
Samantha $ 600,000
Chris (Samantha’s daughter) 100,000
Joey (Samantha’s son) 100,000
Jack (an unrelated third party) 250,000

Obviously, Holly and Terry’s payment are subject to constructive dividend treatment, since apparently, none of the shareholders have earned what they are receiving. The salary of Judy is also subject to complaint because she should not be receiving higher than Jack, who is working to manage the company equally. The compensation issue comes into a question when Judy’s relationship with Holly and Terry is considered.
Again, the Pink Corporation never has distributed any dividend despite having substantial amount of E&P. Considering all disparities in salaries and dividend history, the salary paid to Judy, Holly and Terry is unreasonable.
Answer to question number 14:
The preference comes from the fact that taxpayers have to face certain deduction on received dividends. In case of dividend treatment, only the nominal amount of any dividend resulting from a nonqualified stock redemption would be taxable.
Answer to question number 21:
E & P= $32000
Distributed dividend = $50000
Basis of Stock = $10000
Till the degree of E & P i.e. $32000 dispersal will be treated as dividend and will be taxed at normal rates or as specially taxed dividend. Now about the dispersal, which is not preserved as dividend is the extra paid afterward allocating entire E & P to the degree of stock basis is not taxable. In other words, $10000 is not taxable. So, now the excess left after stock basis is treated as capital gain, which is treated as gain from sale or exchange. So, $8000 ($50,000-$32,000-$10,000) is treated as capital gain.
Hence,
Dividend Income = $32,000
Basis’s Tax free recovery = $10,000
Capital gain = $8,000
Total = $50,000
Answer to question number 22:
Value of current E&P as on 30th April = 84,000 × 4 ÷ 12 = $28,000
Value of current E&P as on 31st December = 84,000 × 8 ÷ 12 = $56,000
April 30th, Accumulated E&P = $42,000 – $28,000 = $14,000
December 31st, Accumulated E&P = $28,000 – $14,000 = $14,000
December 31st, treated as Return and Capital = $58,000 – $56,000 ¬– ($28,000–$14,000) = $16,000

Particulars From Current E&P From Accumulated E&P Treated as Return of Capital
April 30, Distribution of $42,000 $28,000 $14,000
December 31, Distribution of $58,000 $56,000 $14,000 $16,000
Answer to question number 24:
Fair market value of the property is considered as gross dividend income on the distribution. Therefore, the amount of K’s gross dividend income on the distribution is $850,000. Distribution of non-cash property to shareholders is shown below:
Particulars Amount ($)
Money Received 0
Add: Fair market value of the property distributed 850,000
Less: liabilities assumed by the shareholder on property received 230,000
K’s basis in the property received 620,000
Therefore, K’s basis in the property received is $620,000.
Answer to question number 28:
a. The stock redemption made by B is a qualified stock redemption and she is in the tax bracket of 15%. This indicates that she has to pay 15% tax on her dividend.
The taxable dividend of B can be computed by deducting the value of the adjusted stock from the actual money distributed to B. The taxable dividend is computed as shown below:
Tax dividend = Actual dividend released – adjusted stock value
= $200,000 – $45,000
= $155,000
Now, the tax payable can be found by multiplying the taxable dividend with the suitable tax rate:
Tax payable = Taxable dividend × Tax rate
= $155,000 × 15%
= $23,250
Hence, B has to pay tax of $23,250 on her receipt of dividends.
b. The stock redemption made by Y is unqualified. Hence, the distribution received by Y will become taxable. Hence, the tax liability can be computed as shown below:
Tax payable = Taxable dividend × Tax rate
= $200,000 × 15%
= $30,000
Hence, Y has to pay tax of $30,000 on her receipt of unqualified dividends.
Answer to question number 32:
Accumulated earning of the Blue corporation = 100,000
Current year E & P = 60,000
Total accumulated earnings = 160,000
Blue corporation distribute = 200,000
Out of 200,000 Blue Corporation is having 160,000 in E & P account only $160,000.
Remaining 40,000 (200,000 –160,000) would be adjusted against the shareholder’s stock base.
PAM position:
Distribute amount 100,000
Dividend Share (160,000/2) 80,000 would be taxed as ordinary income
Remaining balance 20,000
Would be adjusted against stock 11,000
capital gain 9,000 would be taxed as per rates applicable.
JOHN position:
Distributable amount 100,000
Dividend Share (160,000/2) 80,000 would be taxed as ordinary income
Remaining balance 20,000
Would be adjusted against stock 20,000 (26,000 – 20,000)
Value of stock remaining 6,000
capital gain 0 no taxes.
Answer to question number 33:
The solution taken from excel sheet:

Answer to question number 36:
Taxable income increase (decrease) E&P increase (decrease)
a. +$10,000 No effect
b. –$24,000 +$22,400
c. No effect +$120,000
d. +$6,000 +$14,000
e. –$45,000 +$45,000
f. –$100,000 +$80,000
g. No effect –$20,000
h. –$80,000 –$10,000
i. No effect –$80,000
Net Effect –$233,000 +$171,400