Lesson 2A:  In Class Problem:

Reggie transfers $500,000 in cash to newly formed J corporation for 100% of J’s stock.  In the first year of operations, J’s taxable income before any payments to Reggie is $120,000.  The corporation pays Reggie a salary of $20,000.  What total amount of taxable income and tax liability must Reggie and J report in the following two scenarios?  Use the regular graduated corporate tax rates and assume a flat individual tax rate of 30%. 

1)	J distributes a $70,000 dividend to Reggie in addition to the salary mentioned above.

2)	Assume that when J was formed, Reggie transferred the $500,000 to the corporation in exchange for $250,000 of J stock and $250,000 in notes payable in 5 annual installments of $50,000 plus 6% annual interest on the unpaid balance.  During the current year, J pays Reggie $50,000 in repayment on the note, plus $15,000 interest in addition to the salary mentioned above.

3)	Same as scenario 1, except that J corporation has elected to be treated as an S corporation?  Also,  compute R’s basis in his investment in J at the end of the year.

4)	Same as scenario 2, except that J is an S corporation?