Question

Indigo Corporation wants to transfer cash of $321,000 or property worth $321,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock redemption. If Indigo distributes property, the corporation will choose between two assets that are each worth $321,000 and are no longer needed in its business: Property A (basis of $160,500) and Property B (basis of $417,300).

a. Compute Indigo's recognized gain or loss if it distributes Property A in redemption of Linda's shares.

The distribution of Property A would result in a realized gain  of _______$ to Indigo, of which _______$ is recognized.

b. Compute Indigo's recognized gain or loss if it distributes Property B in redemption of Linda's shares.

The distribution of Property B would result in a realized loss  of ________$ to Indigo, of which ________$ is recognized.

c. Compute Indigo's recognized gain or loss if it sells Property B to an unrelated party, then distributes the sale proceeds in redemption of Linda's shares.

A sale of Property B to an unrelated party would result in a realized loss  of ________$ to Indigo, of which ________$ is recognized.

Answer 1

ANSWER

a) Calculation of recognized gain to Indigo = Fair market value - Basis of Property A.

= 321,000 - 160,500

= $ 160,500

b) Calculation of disallowed loss to Indigo =  Fair market value - Basis of Property B.

= 321,000 - 417,300

= 96,300(Loss amount)

Conclusion:- a). Recognized Gain = $ 160,500 and b). Disallowed loss = $ 96,300.

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