Determine the total amount of payment and its tax treatment

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Reference no: EM131198255

Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.

a. How do Chaz and the corporation treat the $5,000 distribution?

b. Assume, instead, that Chaz transfers to the corporation cash of $30,000 for stock and cash of $30,000 for a note of the same amount. The note is payable in equal annual installments of $3,000 each (beginning at the end of the corporation's initial year of operations) and bears interest at the rate of 6%. At the end of the year, the corporation pays an amount to meet this obligation. Determine the total amount of the payment and its tax treatment to Chaz and the corporation.

Reference no: EM131198255

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