Question

During the current year, Stigma Corporation distributes the assets listed below to its sole shareholder,Jessica. Assume that Stigma has an E&P balance exceeding the amount distributed and is subject to a 34% marginal tax rate. Unless stated otherwise, adjusted bases for taxable income and E&P purposes are the same.

Requirement

For each asset listed, determine the gross income recognized by Jessica,her basis in the asset, the amount of gain or loss recognized by Stigma,and the effect of the distribution on Stigma's E&P.

a.	A parcel of land used in Stigma's business that has a $500,000 FMV and a $200,000 adjusted basis.
b.	Assume the same facts as in Part a except that the land is subject to a $200,000 mortgage.
c	FIFO inventory having a $32,000 FMV and a $24,000 adjusted basis.
d.	A building used in Stigma?'s business having an original cost of $260,000?, a $600,000 FMV, and a $180,000 adjusted basis for taxable income purposes.Stigma has claimed $80,000 of depreciation for taxable income purposes under the straight-line method. Depreciation for E&P purposes is $70,000.
e.	An automobile used in Stigma's business having an original cost of $17,000?,a $9,000 FMV, and a $8,160 adjusted basis. For taxable income purposes,Stigma has claimed $8,840 of MACRS depreciation on the automobile. For E&P purposes, depreciation is $7,400.
f.	Installment obligations having a $55,000 face amount (and FMV) and a $46,800 adjusted basis. The obligations were created when Stigma sold a Sec. 1231 asset.

Answer 1

a) Parcel of land= $500,000

Adjusted Basis =$200,000

Gain Realised=$300,000 (Gross), Net gain= 300,000*(1-0.34)=198,000

b) Land= $500,000

Mortgage=$200,000

Value=$200,000

Gain=$100,000 (Gross), Net=64,000

c) Gross Gain= $32,000-$24000

=$8000, Net gain= 8000*.64= $5120

d)Orinal cost= $260,000

FMV=$600,000

Adjustable basis=$180,000 (Cost-depreciation)

Depreciation for E&P purpose=$70,000

Gross GAin=$600,000-$180,000

=$420,000

Net gain= $350,000(1-.34)+70,000

=294000