Question

Pete, the sole shareholder of Robin Corporation, had a basis of $120,000 in Robin stock that he sold to Adam on August 1, 2019, for $180,000. Robin had accumulated E & P of $26,000 on January 1, 2019, and current E & P (for 2019) of $90,000. During 2019, Robin made the following distributions: $60,000 cash to Pete on July 1, 2019, and $120,000 to Adam on November 1, 2019.

Required: a. Determine the tax consequences of the distribution to Pete and his gain on the sale of his stock to Adam. b. What are the tax consequences of the distribution to Adam?

Answer 1

a- distribution by robin to pete

Cash of $60000 distributed to pete will not reduce the taxable income of Robin Corporation. However the cash so received by pete will be taxable in the hands of Pete.

Gain on sale of stock

Pete sold the robin stock to Adam for $180000 therefore making a profit of $60000 ($180000-$120000). It is assumed that the Pete held the Robin stock for more than one year before he sells it to Adam, therefore making it a long term capital gain.

It will attract tax as per the following rates

Tax bracket. Capital gain tax rate(long term)

10%,15%. 0%

25%,28%,33%,35%. 15%

39.6%. 20%

B- tax consequences of distribution to Adam

Accumulated E&P- $26000

E&P of current year- $90000

Total - $116000

Paid to Pete- ($60000)

Available to Adam- $56000

$56000 will be treated as dividend and will be taxable in the hands of Adam.