Question

A. General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of...

A.

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X9. Henry owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

B.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X9, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X9. What are the tax consequences to Comet because of the stock redemption?

Homework Answers

Answer #1

1. Henry has a capital gain of $25,000 and has tax basis of $100 per share for his remaining number of shares. This is done because as per partial liquidation rules an individual gets exchange treatment in the whole transaction.  

2. A reduction of $50,000 in E&P because of the exchange. This is done because when a stock redemption is treated as an exchange, the corporation distributing reduces its E&P by the lesser of:

  • the amount paid in redemption or  
  • percentage of stock redeemed multiplied by the E&P on the day of redemption.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Aggie Corporation made a distribution of $586,000 to Rusty Cedar in partial liquidation of the company...
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 following is a partial trial balance for General Lighting Corporation as of December 31, 2016:...
The following is a partial trial balance for General Lighting Corporation as of December 31, 2016:   Account Title Debits Credits   Sales revenue 3,050,000   Interest revenue 94,000   Loss on sale of investments 29,500   Cost of goods sold 1,330,000   Loss from write-down of inventory due to obsolescence 340,000   Selling expenses 440,000   General and administrative expenses 220,000   Interest expense 93,000 300,000 shares of common stock were outstanding throughout 2016. Income tax expense has not yet been recorded. The income tax rate is 40%....
Viking Corporation is owned equally by Sven and his wife, Olga, each of whom hold 100...
Viking Corporation is owned equally by Sven and his wife, Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption? $75,000 capital gain and a tax basis in each of his remaining shares...
Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark...
Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark Mountain regions. The following disclosure note appeared in the company’s 2021 annual report: Note 5. Convertible Preferred Stock (in part): The Company has the following Convertible Preferred Stock outstanding as of September 2021: Date of issuance: June 17, 2018 Optionally redeemable beginning: June 18, 2020 Par value (gross proceeds): $ 1,900,000 Number of shares: 190,000 Liquidation preference per share: $ 10 Conversion price per...
Part A In late 2015, the Nicklaus Corporation was formed. The corporate charter authorizes the issuance...
Part A In late 2015, the Nicklaus Corporation was formed. The corporate charter authorizes the issuance of 6,000,000 shares of common stock carrying a $1 par value, and 2,000,000 shares of $5 par value, noncumulative, nonparticipating preferred stock. On January 2, 2016, 4,000,000 shares of the common stock are issued in exchange for cash at an average price of $15 per share. Also on January 2, all 2,000,000 shares of preferred stock are issued at $20 per share. Required: 1....
Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark...
Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in the Ozark Mountain regions. The following disclosure note appeared in the company’s 2018 annual report: Note 5. Convertible Preferred Stock (in part): The Company has the following Convertible Preferred Stock outstanding as of September 2018: Date of issuance: June 17, 2015 Optionally redeemable beginning: June 18, 2017 Par value (gross proceeds): $ 2,500,000 Number of shares: 100,000 Liquidation preference per share: $ 25.00 Conversion price per...
The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Tonta Company for...
The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Tonta Company for $900,000 cash. The balance sheet for the Tonta Company on the date of acquisition showed the following: Assets Current assets $100,000 Equipment 300,000 Accumulated depreciation (100,000) Plant 600,000 Accumulated depreciation (250,000) Total $650,000 Liabilities and Equity Bonds payable, 8% $200,000 Common stock, $1 par 100,000 Paid-in capital in excess of par 200,000 Retained earnings 150,000 Total $650,000 Required: The equipment has a fair value...
On December 31, 2020, Cullumber Corporation had the following shareholders’ equity accounts: CULLUMBER CORPORATION Balance Sheet...
On December 31, 2020, Cullumber Corporation had the following shareholders’ equity accounts: CULLUMBER CORPORATION Balance Sheet (partial) December 31, 2020 Shareholders’ equity      Common shares (unlimited number of shares authorized, 86,000 issued) $1,156,000      Retained earnings 560,000 Total shareholders’ equity $1,716,000 During the year, the following transactions occurred: Jan. 15 Declared a $1 per share cash dividend to shareholders of record on January 31, payable February 15. July 1 Announced a 3-for-2 stock split. The market price per share on the date...
Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold...
Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 1,800 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 460 of her shares for $29,900 per share on December 31 of this year. Wilma’s income tax basis in each share is $8,300. Flintstone has current E&P of $10,620,000 and accumulated E&P of $50,040,000. a. What is the amount and character...
On December 31, 2020, Blossom Corporation had the following shareholders’ equity accounts: BLOSSOM CORPORATION Balance Sheet...
On December 31, 2020, Blossom Corporation had the following shareholders’ equity accounts: BLOSSOM CORPORATION Balance Sheet (partial) December 31, 2020 Shareholders’ equity      Common shares (unlimited number of shares authorized, 85,000 issued) $1,000,000      Retained earnings 490,000 Total shareholders’ equity $1,490,000 During the year, the following transactions occurred: Jan. 15 Declared a $1 per share cash dividend to shareholders of record on January 31, payable February 15. July 1 Announced a 2-for-1 stock split. The market price per share on the date...