Question

Part 1:

Compare and contrast the corporate taxable income formula with the individual taxable income formula.

Part 2:

Z-Sisters Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

Shares

Lourdes Vick	400
Anita Vick (Lourdes’s daughter)	200
Liz Vick (Lourdes’s daughter)	200
Cat Labrillazo (unrelated)	200
Total	1000

Z-Sisters 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 Lourdes’s stock for $200,000. Lourdes’s basis in the 200 shares redeemed was $100,000.

09/30: Redeemed 60 shares of Cat’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).

• Determine the tax status of each distribution made this year. (Hint: First, consider if the redemptions are treated as dividend distributions or exchanges.)
• Compute the corporation’s accumulated E&P at January 1 of next year.
• Lourdes is considering retirement and would like to have the corporation redeem all of her shares for $100,000 plus a 10-year note with a fair market value of $300,000.
• What must Lourdes do or consider if she wants to ensure that the redemption will be treated as an exchange?
• Could Lourdes still act as a consultant to the company?
• Z-Sisters Corporation must pay attorney’s fees of $5,000 to facilitate the stock redemptions. Is this fee deductible?

Assess the belongings to the United States, residential status is as a resident.

Answer 1

Solution:

Part 1

Corporate tax is an expense of a business (cash outflow) levied by the government that represents a country's main source of income. whereas personel income tax is a type of tax governmentally imposed on an individual's income, such as wages and salaries.

Corporate tax

corporate tax is also called company tax or corporation tax, is a direct tax levied on a company,s income or capital by the government. Corporate taxes are subtracted from the earnings before tax figure in a company's income statement to arrive at net income ( net profit ) generated for a particular period. The maximum corporate tax rate is equal to 35%. corporate taxes apply to the following institutions.

1. All corporations originated in the country ( small, medium, and large)

2. Corporations running a business inside the country

3. Foreign enterprises with a permanent establishment in the country

Personel income tax

Personel income tax is a tax imposed by a government on an individual's income. In other words , the income tax is payable on an employee's wages and salaries. Most individual do not pay the individual income tax on the full amount of income due to tax exemptions, deductions, and credits. A series of deductions is offered by the U.S International Revenue Service, eg, deductions for healthcare and education expenses, which taxpayers benefit from to reduce their taxable income. Personel income tax rates vary from country to country because of different laws and government systems. Although , the majority of the countries employ a so- called progressive income tax system, which means those who earn more are subject to a higher tax rate compared to the lower - income earners . Personel income tax applies to the following entities.

1. Self - employed individuals

2. Full-time employees.