Reference no: EM132847479

Question - On January 2, Chaz transfers cash of $146,200 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $36,550. The income is credited to its earnings and profits account. The corporation distributes $10,965 to Chaz.

a. How do Chaz and the corporation treat the $10,965 distribution?

b. Assume instead that Chaz transfers to the corporation cash of $73,100 for stock and cash of $73,100 for a note of the same amount. The note is payable in equal annual installments of $7,310 and bears interest at the rate of 6%. No distributions are made during the year to Chaz. However, at the end of the year, the corporation pays an amount to meet the loan obligation (i.e., the annual $7,310 principal payment plus the interest due).

What is the total amount of the payment and its tax treatment to Chaz and the corporation.