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).
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? 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.