Check figures:

(a) Addition to each shareholders stock basis 67

(b) Addition to each shareholders AAA 17

Problem

The stock of X is owned equally by two shareholders: Y (an individual with a stock basis of $100) and A (an individual with a stock basis of $40). X uses the accrual method, A and Y use the cash method, and all use the calendar year. (Assume 1059 does not apply.) During the current year, X accrued income and expense as set follows. X has always been an S corporation.

Gross income from business $500

Dividends on AT&T stock (consider section 243) 100

Interest on municipal bonds (section 103) 100

Capital gain 100

Total: $800

Deductible section 162(a)(1) business expenses $430

Noncapital expenses not deductible under section 162(e) 90

Capital losses (see section 1211(a)) 146

Total $666

Net $134

(a) What is Xs E&P?

(b) How much is each shareholders personal income tax return affected for the current year by the tax items of X? (Show any S level taxes, separately computed income items for each shareholder, and nonseparately computed income for each shareholder.)

(c) How will Xs distribution of $100 to each shareholder in the current year affect the shareholders? (Show a complete calculation of basis and the effect of the distribution for each shareholder.)

(d) Alternatively, X has E&P of $100 from years before it was an S corporation and nothing in its AAA from prior S years. The $100 is capital gain from the sale of stock held for investment and the $500 gross income from business is also gross receipts from business. Assume the stock for investment was acquired while an S corporation. Assume other facts remaining the same including the $100 distribution to each shareholder. Discuss the following, showing calculations where appropriate.

(1) 1374 tax,

(2) 1375 tax (calculate excess passive income) and consequences, and

(3) AAA and E&P and basis.

Please show computations on each question.