5A(9)

Assumtions: The stock of X is owned equally by two shareholders: Y(a corporation) and A (an individual). X and Y use the accrual method, A uses the cash method, and all use a calendar taxable year. Assume Code Section 1059 does not apply. Use a 34 percent corporate tax rate in this problem. During the current year, X accrued income and expenses as follows:

Gross income from business $500

Dividends on AT&T stock (consider Code Section 243) $100

Interest on municipal bonds (Code Section 103) $100

Capital Gain $100

Total $800

Deductible Code Section (a)(1) business expenses $430

Noncapital expenses not deductible under Code Section 162(e) $90

Capital losses (see Code Section 1211(a)) $146

Total $146

Net $134

Suppose that Y is an individual and that X has always been an S corporation.

A) What is X's E&P?

B) How is each shareholder's personal income tax return affected for the current year by the tax items?

C) How will X's distribution of $100 to each shareholder in the current year affect shareholders?

D) X has E&P of $100 from years before it was an S corporation and nothing in its accumulated adjustments account from prior S years. The $100 captial gain is from the sale of stock held for investment, and the $500 gross income from business is also gross receipts from business.