In 1994, Mr. and Mrs. Adams formed ADC by transferring $50,000 cash in exchange for 100 shares

Question:

In 1994, Mr. and Mrs. Adams formed ADC by transferring $50,000 cash in exchange for 100 shares of common stock and a note from the corporation for $49,000. The note obligated ADC to pay 10 percent annual interest and to repay the $49,000 principal on demand. ADC has never declared a dividend or made any interest payments on the note. Last year, it distributed $25,000 cash to Mr. and Mrs. Adams as a principal repayment. When the IRS audited ADC’s tax return, the revenue agent determined that this payment was a constructive dividend.

a. If ADC’s marginal tax rate last year was 34 percent, calculate any increase or decrease in ADC’s tax as a result of this constructive dividend.

b. If Mr. and Mrs. Adam’s marginal tax rate is 35 percent, calculate any increase or decrease in their tax as a result of this constructive dividend.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

Fantastic news! We've Found the answer you've been seeking!