1A. Exxon Corporation is a calendar year C corporation in the business of providing fuel. It has 3 unrelated shareholders who are individuals: Pat, Dan, and Nancy. Pat owns 15% of the stock, Dan owns 15% of the stock, and Nancy owns 70% of the stock. All three shareholders have loaned money to Exxon at an sufficient interest rate of 6%. The interest expense in the hands of Exxon Corporation for 2010 amounts to $10,000 attributable to Pat’s loan, $10,000 attributable to Dan’s loan, and $50,000 attributable to Nancy’s loan. The interest payments are paid to all three shareholders on February 15, 2013.
1. Suppposing both Exxon and the 3 shareholders are cash basis taxpayers:
a) How much of the $70,000 interest expense is deductible by Exxon for tax year 2012?
b) How much of the $70,000 interest income is identified by Pat, Dan, and Nancy for 2012?
2. Supposing both Exxon is the accrual method taxpayer and the 3 shareholders are cash basis taxpayers:
c) How much of the $70,000 interest expense is deductible by Exxon for tax year 2012?
d) How much of the $70,000 interest income is identified by Pat, Dan, and Nancy for 2012?
1B. Suppose the same facts as in 1A above, except that interest payment checks were placed on shareholders’ office on December 31, 2012. Though, the shareholders are not in the office that day due to New Year celebrations. Exxon is the accrual method taxpayer and the 3 shareholders are cash basis taxpayers: (Hint ------>Constructive Receipt Doctrine)
a) How much of the $70,000 interest expense is deductible by Exxon for tax year 2012?
b) How much of the $70,000 interest income is known by Pat, Dan, and Nancy for 2012?
2A. Chewi Corporation, Greg (Individual), and Carla (Individual) own 30 shares, 30 shares, and 40 shares respectively, in Searl Corporation. Searl has 100 shares outstanding and accumulated E&P of $200,000, present E&P of $0. Corporation redeems 20 shares of Carla’s stock for $30,000. Carla paid $200 a share for the stock two years ago. Carla owns 90% of Chewi Corporation. For purposes of the substantially disproportionate distributions test: (Hint: Corporate Attribution Rules ------> FROM CORPORATION TO SHAREHOLDER)
Find out
a) Whether stock redemption qualifies for sale or exchange treatment in the hands of Carla. Also find out the amount of gain, if any.
b) Whether the stock redemption qualifies for dividend treatment in the hands of Carla. Also find out the amount of the dividend to Carla, if any.
2B. Suppose the same facts as in 4A above, except that instead of redeeming 20 shares of Carla’s stock, Searl Corporation redeems 20 shares owned by Chewi Corporation. For purposes of the substantially disproportionate distribution test: (Hint: Corporate Attribution Rules ------> FROM SHAREHOLDER TO CORPORATION)
Find out
a) Whether stock redemption qualifies for sale or exchange treatment in the hands of Chewi Corporation. Also find out the amount of gain, if any.
b) Whether the stock redemption qualifies for dividend treatment in the hands of Chewi. Also find out the amount of the dividend to Chewi, if any.