Reference no: EM132463260

Question a: Corporation and Terry, an individual. X and Y use the accrual method, Terry uses the cash method, and all use a calendar taxable year. Assume section 1059 does not apply. Use a 34% corporate tax rate in this problem. During the current year, X accrued income and expenses as follows:

Question (b) On December 24 of the preceding year, Y and Terry incorporated X and capitalized X with cash of $100 each. On December 31 of that preceding year, Y and Terry received distributions from X of $5 each; X did not earn any income for that year. In addition, Y and Terry received distributions of $5 each, in the current year. Which distributions should be gross income to Y and Terry, in what amounts, and why? What does E&P have to do with this?

Question 1: Alternatively, assume that Terry 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 Terry on December 31 of the current year. Should the distribution be taxable income to Terry? Why?