Question

2.   LoWay Exterminators, Inc., is a C-corp with two shareholders. Logan owns a 60% interest with a basis of $30,000. Wyatt owns a 40% interest with a 6,000 basis. Accumulated Earnings and Profits of the Corporation as of January 1, 2017 was $10,000 and Earnings and Profits generated during 2017 were 5,000. On December 31, 2017 the C-corp made a non-liquidating distribution in the total amount of $50,000, with $30,000 going to Logan and 20,000 going to Wyatt. The C-corp did not treat any portion of the distribution as wages or salary.

(7 Points). What are the tax consequences of a $30,000 non-liquidating distribution to Logan?

                (b) (7 Points). What are the tax consequences of a non-liquidating distribution of     

$20,000 of Wyatt?      

Answer 1

As per Section 731 in case on cash distribution under the situtaion of non liquidation there is a gain to be recognised in the case the money exceeds the partners adjusted capital position and capital gains tax needs to be paid on it. If there is a loss then no tax is payable.

In the above case the treatment will be as under:

a)

Logan
Basis	30000
Cumu. Profit (60%)	6000
Current Share	3000
Positions	39000
Cash Received	30000.

So as the cash received is lower than net position so no tax consquences will be there for Logan.

Wyatt
Basis	6000
Cumu. Profit (40%)	4000
Current Share	2000
Positions	12000
Cash Received	20000
Benefit/Capital gain	8000

As the total profit after distrubution is 8000 so capital gain needs to be paid as tax consequences for Wyatt.