Jasper Junction Corporation (JJC) is an accrual basis, calendar-year entity that was created by Chao, Iris, and Nolan in 20X1. JJC furnishes the original incorporation agreement. The shareholders' bases in the assets contributed are as follows: Cash $150,000 Equipment $245,000 Inventory $380,000 Land and Building $375,000 The first five years of business have been lean years. Nolan had to loan the corporation $75,000 to ensure that JJC had enough cash to pay its bills and its Accumulated Earnings and Profits only amounts to $23,000 at the end of 20X5. JJC has its first year of substantial income in 20X6. It also sells some of its land for $100,000 cash, but the sale results in a capital loss. The Board of Directors decides to pay $250,000 in dividends to its shareholders. This is in addition to the $3,500 of interest it pays on the bonds and the $1,500 it pays to Nolan on the money he loaned JJC. The income and expenses of JJC for 20X6, taxable income, and current E&P are provided in the Table below.

Business Taxation - Corporate Distributions G UWorld ROGER CPA Review YOUR WORLD OF LEARNING Jasper Junction Corporation (JJC) is an accrual basis, calendar-year entity that was created by Chao, Iris, and Nolan in 20X1. JJC furnishes the original incorporation agreement. The shareholders' bases in the assets contributed are as follows: Cash $150,000 Equipment $245,000 Inventory $380,000 Land and Building $375,000 The first five years of business have been lean years. Nolan had to loan the corporation $75,000 to ensure that JJC had enough cash to pay its bills and its Accumulated Earnings and Profits only amounts to $23,000 at the end of 20X5. JJC has its first year of substantial income in 20x6. It also sells some of its land for $100,000 cash, but the sale results in a capital loss. The Board of Directors decides to pay $250,000 in dividends to its shareholders. This is in addition to the $3,500 of interest it pays on the bonds and the $1,500 it pays to Nolan on the money he loaned JJC. The income and expenses of JJC for 20X6, taxable income, and current E&P are provided in the Table below. Corporate Agreement CORPORATE AGREEMENT Jasper Junction Corporation This corporation agreement (the "Agreement") made and entered into this 6 day of January, 20X1 (the "Execution Date"). AMONGST: Chao of 693 Feather Street, Crane, North Dakota, 58585 Iris of 459 Wing Street, Crane, North Dakota, 58585 Nolan of 4455 Nest Street, Crane, North Dakota, 58585 Individually the "Shareholder" and collectively the "Shareholders" BACKGROUND: The Shareholders wish to associate themselves as owners in the business. The terms and conditions of this Agreement set out the terms and conditions as to how they will be Shareholders. The firm name of the Corporation will be: JASPER JUNCTION CORPORATION. It will also be known as JJC and referred to in the remainder of this document as JJC Purpose The purpose of JJC will be: MANUFACTURING. Place of Business The principal location of the business of JJC will be at 9322 Flight Avenue, Crane, North Dakota, 58585 until such time that the corporation Board of Directors designates a different location IN CONSIDERATION OF and as a condition of the Shareholders entering into this Agreement and other valuable consideration, the receipt and sufficiency of which consideration is acknowledged, the parties to this Agreement agree as follows: Formation By this Agreement the Shareholders enter into a corporation in accordance with the laws of the State of North Dakota. The rights and obligations of the Shareholders will be as stated in the applicable legislation of the State of North Dakota (the "Act"), except as otherwise provided here. Authorized common shares of JJC are 1 million. The par value of each share of common stock will be $100.00 and its fair value will vary based on the value of JJC. Each share of common stock will have the rights of one vote at shareholder meetings. Nonvoting stock is authorized to be issued with not more than 500,000 shares permissible. Common stock will be issued to the shareholders based on the net fair value contributed to the corporation. Authorized preferred shares are 5,000 with a par value of $1,000.00 per share. No preferred shares will be issued at the time of incorporation. Bonds in valuation units of $10,000 may be issued. . Governance The first shareholder meeting shall take place the first day of February, 20X1 and thereafter annually on the first day of February. Written minutes of the meetings must be available for shareholder review. A Board of Directors shall be established by a vote of the shareholders. The Board of Directors will appoint the officers and review their performance annually. Changes to the incorporation agreement must be approved by a 60% shareholder vote based on common stock voting rights. Distributions Subject to state law, the Board of Directors will declare dividends based on ownership as of a date the Board selects, and payment of the dividends must be within 30 days of such date. Distributions that would impair the manufacturing operations are not permitted. Dividends on common stock are not cumulative. Shareholders can force distributions by a 60% vote when there are excess liquid assets that have no valid business purpose for their accumulation. Capitalization Initial capitalization is provided by the initial Shareholders of Nolan, Chao and Iris. Each of the Shareholders has contributed to the capital of JJC in the form of cash or property in agreed- upon value for the stated shares of stock, as follows: Common Shareholder Stock Chao 350 Contribution Description $150,000 CASH and EQUIPMENT valued at $320,000. There is a $120,000 recourse loan on the equipment. INVENTORY valued at $500,000. No loans are attached to this Iris 400* asset. Nolan 250 LAND and BUILDING valued at $650,000 with a $400,000 nonrecourse mortgage At time of incorporation, Iris will receive 10 bonds ($100,000) as partial consideration for her inventory contribution. Taxable Current Amount Income E&P Income Taxable Income 176,500 Sales 412,000 412,000 COGS 150,000 (150,000) Dividends (own 5%) 133,000 133,000 Muni Bond Interest 1,000 1,000 Expenses Capital loss 32,935 (32,935) Interest Expense 5,000 (5,000) Operating Expenses 120,000 (120,000) Key Life Insurance Premiums 6,000 (6,000) Taxable income before Special Deductions 270,000 Charitable contributions 30,000 (27,000) (3,000) Dividend Receivable Deduction (66,500) 66,500 Taxable Income 176,500 Federal Income Tax 37,065 (37,065) Current E&P 165,000 Analyze the information provided to reconcile the shareholders' beginning and ending bases in their stock to determine the federal tax consequences of JJC's corporate distributions. (Decreases should be entered with a minus sign.) Shareholder Ownership Percentage (%) Beginning Basis in Stock Increases or (Decreases) Ending Basis in Stock Taxable Distributions (Dividends/Capital Gains) Chao 1. 2. 3. 4. 5. Dividends Iris 7. 8. 9. 10. 6. Capital gains 11. Dividends 12. Capital gains 17. Dividends Nolan 13. 14. 15. 16. 18. Capital gains Business Taxation - Corporate Distributions G UWorld ROGER CPA Review YOUR WORLD OF LEARNING Jasper Junction Corporation (JJC) is an accrual basis, calendar-year entity that was created by Chao, Iris, and Nolan in 20X1. JJC furnishes the original incorporation agreement. The shareholders' bases in the assets contributed are as follows: Cash $150,000 Equipment $245,000 Inventory $380,000 Land and Building $375,000 The first five years of business have been lean years. Nolan had to loan the corporation $75,000 to ensure that JJC had enough cash to pay its bills and its Accumulated Earnings and Profits only amounts to $23,000 at the end of 20X5. JJC has its first year of substantial income in 20x6. It also sells some of its land for $100,000 cash, but the sale results in a capital loss. The Board of Directors decides to pay $250,000 in dividends to its shareholders. This is in addition to the $3,500 of interest it pays on the bonds and the $1,500 it pays to Nolan on the money he loaned JJC. The income and expenses of JJC for 20X6, taxable income, and current E&P are provided in the Table below. Corporate Agreement CORPORATE AGREEMENT Jasper Junction Corporation This corporation agreement (the "Agreement") made and entered into this 6 day of January, 20X1 (the "Execution Date"). AMONGST: Chao of 693 Feather Street, Crane, North Dakota, 58585 Iris of 459 Wing Street, Crane, North Dakota, 58585 Nolan of 4455 Nest Street, Crane, North Dakota, 58585 Individually the "Shareholder" and collectively the "Shareholders" BACKGROUND: The Shareholders wish to associate themselves as owners in the business. The terms and conditions of this Agreement set out the terms and conditions as to how they will be Shareholders. The firm name of the Corporation will be: JASPER JUNCTION CORPORATION. It will also be known as JJC and referred to in the remainder of this document as JJC Purpose The purpose of JJC will be: MANUFACTURING. Place of Business The principal location of the business of JJC will be at 9322 Flight Avenue, Crane, North Dakota, 58585 until such time that the corporation Board of Directors designates a different location IN CONSIDERATION OF and as a condition of the Shareholders entering into this Agreement and other valuable consideration, the receipt and sufficiency of which consideration is acknowledged, the parties to this Agreement agree as follows: Formation By this Agreement the Shareholders enter into a corporation in accordance with the laws of the State of North Dakota. The rights and obligations of the Shareholders will be as stated in the applicable legislation of the State of North Dakota (the "Act"), except as otherwise provided here. Authorized common shares of JJC are 1 million. The par value of each share of common stock will be $100.00 and its fair value will vary based on the value of JJC. Each share of common stock will have the rights of one vote at shareholder meetings. Nonvoting stock is authorized to be issued with not more than 500,000 shares permissible. Common stock will be issued to the shareholders based on the net fair value contributed to the corporation. Authorized preferred shares are 5,000 with a par value of $1,000.00 per share. No preferred shares will be issued at the time of incorporation. Bonds in valuation units of $10,000 may be issued. . Governance The first shareholder meeting shall take place the first day of February, 20X1 and thereafter annually on the first day of February. Written minutes of the meetings must be available for shareholder review. A Board of Directors shall be established by a vote of the shareholders. The Board of Directors will appoint the officers and review their performance annually. Changes to the incorporation agreement must be approved by a 60% shareholder vote based on common stock voting rights. Distributions Subject to state law, the Board of Directors will declare dividends based on ownership as of a date the Board selects, and payment of the dividends must be within 30 days of such date. Distributions that would impair the manufacturing operations are not permitted. Dividends on common stock are not cumulative. Shareholders can force distributions by a 60% vote when there are excess liquid assets that have no valid business purpose for their accumulation. Capitalization Initial capitalization is provided by the initial Shareholders of Nolan, Chao and Iris. Each of the Shareholders has contributed to the capital of JJC in the form of cash or property in agreed- upon value for the stated shares of stock, as follows: Common Shareholder Stock Chao 350 Contribution Description $150,000 CASH and EQUIPMENT valued at $320,000. There is a $120,000 recourse loan on the equipment. INVENTORY valued at $500,000. No loans are attached to this Iris 400* asset. Nolan 250 LAND and BUILDING valued at $650,000 with a $400,000 nonrecourse mortgage At time of incorporation, Iris will receive 10 bonds ($100,000) as partial consideration for her inventory contribution. Taxable Current Amount Income E&P Income Taxable Income 176,500 Sales 412,000 412,000 COGS 150,000 (150,000) Dividends (own 5%) 133,000 133,000 Muni Bond Interest 1,000 1,000 Expenses Capital loss 32,935 (32,935) Interest Expense 5,000 (5,000) Operating Expenses 120,000 (120,000) Key Life Insurance Premiums 6,000 (6,000) Taxable income before Special Deductions 270,000 Charitable contributions 30,000 (27,000) (3,000) Dividend Receivable Deduction (66,500) 66,500 Taxable Income 176,500 Federal Income Tax 37,065 (37,065) Current E&P 165,000 Analyze the information provided to reconcile the shareholders' beginning and ending bases in their stock to determine the federal tax consequences of JJC's corporate distributions. (Decreases should be entered with a minus sign.) Shareholder Ownership Percentage (%) Beginning Basis in Stock Increases or (Decreases) Ending Basis in Stock Taxable Distributions (Dividends/Capital Gains) Chao 1. 2. 3. 4. 5. Dividends Iris 7. 8. 9. 10. 6. Capital gains 11. Dividends 12. Capital gains 17. Dividends Nolan 13. 14. 15. 16. 18. Capital gains