Assumptions: The stock of ChadCo is owned equally by two shareholders: SecondCo (a corporation) and Arnold (an individual). ChadCo and SecondCo use the accrual method, Arnold uses the cash method. All use a calendar taxable year. Assume § 1059 does not apply. Use a 34 percent corporate tax rate in this problem. During the current year, ChadCo accrued income and expenses as follows:Gross Income from business: $500,000Dividends on AT&T stock (consider section 243): 100,000Interest on municipal bonds (section 103): 100,000Capital gain: 100,000Total: 800,000Deductible section 162(a)(I) business expenses: 430,000Noncapital expenses not deductible under section 162(e): 90,000Capital losses (see section 1211(a)): 146,000Total: 666,000Net: 134,000 (800,000 – 666,000)(1) On December 24 of the preceding year, SecondCo and Arnold incorporated ChadCo and capitalized ChadCo with cash of $100,000 each. On December 31 of that preceding year, SecondCo and Arnold received distributions from ChadCo of $5,000 each; ChadCo did not earn any income for that year. In addition, SecondCo and Arnold received distributions of $5,000 each, in the current year.Which distributions should be gross income to SecondCo and Arnold, in what amounts, and why? What does E&P have to do with this?(2) Alternative: Arnold just bought the ChadCo shares on December 30 of the current year from another shareholder for FMV of $145,000, before the declaration and payment of a $5,000 distribution to Arnold on December 31 of the current year.Should the distribution be taxable income to Arnold? Why?(3) Now assume that SecondCo’s basis in its ChadCo stock is $100,000 and Arnold’s basis in his ChadCo stock is $40,000. On January 2 of the current taxable year, ChadCo distributes $100,000 in cash to SecondCo and $100,000 in cash to Arnold. As of the end of the preceding taxable year, ChadCo’s accumulated E&P was zero.What are the tax consequences of this distribution to ChadCo, SecondCo, and Arnold? [Hint: First compute ChadCo’s current-year taxable income and then compute current- year E&P before reducing the E&P for the distribution (“interim E&P”); after reducing for the distribution, compute final accumulated E&P.](4)  Variation: Assume Arnold’s shares were owned by a different shareholder every quarter and $50,000 was distributed ratably to all shareholders quarterly?How much dividend would SecondCo and the holders of Arnold’s shares receive?(5)  Suppose under the basic facts in (3) above that ChadCo had an accumulated de fi cit of $100,000 in its E&P account as of December 31 of the preceding taxable year.(6)  If, on December 1 of the current year (the declaration date), ChadCo’s board of directors voted to pay the $200,000 distribution by mailing the checks on December 31 of the current taxable year (the payment date, the identi fi cation of which is a practice generally used only by widely held corporations) to shareholders of record on December l5 of the current taxable year (the record date), such checks actually being received by SecondCo and Arnold in the mail on January 2 of the next year? Assume that SecondCo and Arnold are the public and that they are the only shareholders (as in the basic facts).How would your answer to (3) above change?(7)  Suppose that SecondCo is an individual and that ChadCo has always been an S corporation.What is ChadCo’s E&P‘? How is each shareholder’s personal income tax return affected for the current year by the tax items of ChadCo? How will ChadCo distribution of $100,000 to each shareholder in the current year affect shareholders?