Question

1. Turnip, Inc., a C corporation, distributes a tract of land held as an investment (FMV = $82,000, basis = $22,000) to Chang, its majority (60%) shareholder in exchange for all of his stock. Turnip, Inc. has accumulated E & P of $50,000 and a marginal tax rate of 21%. Chang’s basis in his Turnip’s stock is $20,000 and has an individual marginal tax rate of 32%, a long-term capital gains tax rate of 15%, and $100,000 of other long-term capital gains. The distribution qualifies as a corporate liquidation. Chang has held his stock for three years. a. What is the tax impact of the distribution to Turnip, Inc.?

Answer 1

Turnip has a gain = FMV - Basis = $82,000 - $22,000 = $60,000

The $60,000 gain increases Turnip's AAA.

The AAA is reduced by the FMV of the property distribution, $82,000.

Turnip Inc., must recognise $60,000 of long term capital gain.

C corporation is deemed to have sold the distributed property at fair market value. The gain is the difference between the FMV of $82,000 and its basis of $22,000.

The gain is long term capital gain since land is held as an investment.