Assumption: 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....

Assumption: 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 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 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 1121 (a))​​​$146 Total​​​​​​​$666 Net​​​​​​​$134 (2) On December 24 of the preceding year, Y and A incorporated X and capitalized X with cash of $100 each. On December 31 of the preceding year, Y and A received distributions from X of $5 each; X did not earn any income for that year. In addition, Y and A received distribution of $5 each, in the current year. Which distributions should be gross income to Y and A, in what amounts, and why? What does E&P have to with this? Alternative: A just bought the X shares on December 30 of the current year from another shareholder for FMV of $145, before the declaration and payment of a $5 distribution to A on December 31 of the current year. Should the distribution be taxable income to A? Why? (3) Now assume that Y’s basis in its X stock is $100 and A’s basis in his X stock is $40. On January 2 of the current taxable year, X distributes $100 in cash to Y and $100 in cash to a. As of end of preceding taxable year, X’s accumulated E&P was zero. What the tax consequences of this distribution X, Y and A? [Hint: First compute X’s current-year taxable income and then compute current-year E&P before reducing the E&P for the distribution (“interim E&P”); after reducing for the distribution, compute final accumulated E&P.] Variation: How much dividend would Y and the holders of A’s share receive if A’s shares were owned by different shareholder every quarter and $50 was distributed ratably to all shareholders quarterly? (4) Suppose under the basic facts in (3) above that X had an accumulated deficit of $100 in its E&P account of December 31 of the preceding taxable year.