Question

Aggie Corporation made a distribution of $586,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100 percent of Aggie Corporation. The distribution was in exchange for 50 percent of Rusty’s stock in the company. At the time of the distribution, the shares had a fair market value of $180 per share. Rusty’s income tax basis in the shares was $46 per share. Aggie had total E&P of $8,060,000 at the time of the distribution.

a. What is the amount and character (capital gain or dividend???) of any income or gain recognized by Rusty as a result of the partial liquidation?

____________ ________________

b. Assuming Aggie made no other distributions to Rusty during the year, by what amount does Aggie reduce its total E&P as a result of the partial liquidation?

Reduction in E&P________

Answer 1

a. Fair market value per share:            $ 180

Rusty's income tax basis per share:       $46

Hence, capital gain per share:              $ 134

An individual receives exchange treatment on distributions in partial liquidation of stock. Hence, the amount of capital gain recognised by Rusty as a result of partial liquidation is $134 per share

b. Aggie reduces its E&P by the greater of the amount distributed ($586,000) or the pro-rata amount of the E&P attributable to the redeemed percentage amount (50% × $8,060,000 = $4,030,000). In this case, Aggie reduces its E&P by $586,000