Question

Comprehensive Problem 7-67 (LO 7-1, LO 7-2, LO 7-3, LO 7-4, LO 7-5) 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 Mike Jackson Joe's son) Jane Jackson Joo'daughter Vinnie Drice [unrelated Total shares 200 200 1.000 Thriller Corporation has current E&P of $400,000 for this year and accumulated E&P at January 1 of this year of $60,000. During this year, the corporation made the following distributions to its shareholders 03/31 Distributed $100 per share to each shareholder $100,000 in total) 06/30: Distributed $100 per share to each shareholder $100.000 in total) 09/30: Distributed $100 per share to each shareholder $100.000 in total) 12/31 Redeemed all of Vinnie's shares for $250,000 in cash a. Determine the tax status of each distribution made this year. Treatment Joe distribution on 03/31 distribution on 06/30 distribution on 09/30 distribution on 12/31 b. Compute the corporation's accumulated E&P at January 1 of next year. (Do not round Intermediate calculations) < Prev 17 17

Answer 1

Q.1 : Determination of status of Dividend

Ans.1

There are two type of dividend viz Ordinary Dividend and Qualifying Dividend. The classification is significant since qualified divided is taxable at concessional rate.

There are the criteria for qualified dividend and all other dividend which is not qualified is ordinary dividend.

Qualified dividend are those dividend which is declared by US company and shareholder meets the specified holding period requirement.

It is assumed that Holding period condition is met since no information is provided in this regard.

In view of above all three declaration of dividend would be treated as "qualifying dividend" for all the shareholders.

Stock redemption can be treated as dividend payment or redemption of stock. When all shares are redeemed it will be treated as stock sale and it will be subject to capital gain in the hand of Vinnie. The taxable capital gain in the hands Vinnie would be redeemed amount - basis in investment.

31/03	100,000.00.	Ordinary Dividend
30/06	100,000.00	Ordinary Dividend
30/09	100,000.00	Ordinary Dividend
31/12	250,000.00	Stock Sale

Q.2 Calculation of corporation accumulated E&P on 01/01 next year :

The accumulated E&P would be 160,000 (400,000+60,000-300,000)