Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.
a. How do Chaz and the corporation treat the $5,000 distribution?
b. Assume, instead, that Chaz transfers to the corporation cash of $30,000 for stock and cash of $30,000 for a note of the same amount. The note is payable in equal annual installments of $3,000 each (beginning at the end of the corporation's initial year of operations) and bears interest at the rate of 6%. At the end of the year, the corporation pays an amount to meet this obligation.
Determine the total amount of the payment and its tax treatment to Chaz and the corporation.