Thunder Incorporated has issued 2000 shares of one class of common stocks. These shares are outstanding throughout 2018 and are owned as follows:
Isaac Newton-800 shares, Ben Newton (son of Isaac)-400 shares, Mary Newton (daughter of Isaac)-400 shares, Sam Melvin-400 shares, for a total of 2000 shares.
Thunder Incorporated’s reported current Earnings and Profit of $600,000 in 2018, and accumulated Earnings and Profits of $1,000,000 at the beginning of 2018.
The corporation made the following distributions to its shareholders:
03/31/2018: It distributed $20/share to each shareholder or $40,000 in total ($20 x 2000).
06/30/2018: It bought back 400 shares of Isaac’s stock for $400,000 with a corresponding basis at the time of $200,000.
09/30/2018: Redeemed 120 shares of Sam’s stock for $120,000 with a basis of $72,000 for all 120 shares.
12/21/2018: It distributed $20/share to each shareholder for a total of ($29,600 in total).
Requirements:
- Determine the tax treatment of each distribution above as either a dividend distribution, an exchange, or return of capital. Explain the tax rule that justifies and supports the determination made for each distribution.
- Calculate Thunder Inc.’s accumulated Earnings Profits at December 31, 2018.
- Isaac is planning to retire and would like to sell all his shares to the corporation for $200,000 and a 10-year note with a fair market value of $600,000.
- Explain what Isaac and the corporation must do and consider to be sure that the sale or redemption of his shares is treated as an exchange.
- Could Joe become or stay as a consultant to the company? Please justify your position using the most recent tax law provisions.
- The attorney’s fees affecting the disposal of Isaac’s shares were $10,000, could these fees be deductible expenses for the corporation for tax purposes? Please support your position using current tax law or other industry and scholarly sources.
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