Ch 6 Question
Chapter 6 Questions
38.) a.) Teal Corporation would have a taxable gain of $70,000 on the property distribution ($250,000-$180,000). The gain would be ordinary or capital depending on the type of property distributed. The E&P of Teal would increase by $70,000 and decrease by $250,000. Teal’s E&P also would be decreased by the amount of tax due on the gain. Grace would have dividend income of $250,000 and a basis in the property of $250,000. b.) The tax consequences to Teal Corporation would be the same as listed above, but Grace would have dividend income of $250,000, but only 20% of the $250,000, or $50,000, would be taxed to Grace. Because Grace has a 20% or more ownership interest in Teal Corporation, the 80% dividends received deduction is applicable. Grace Corporation would have a basis of $250,000 in the property. c.) The tax consequences to Teal Corporation would again be the same as in a.) Grace would have a capital gain of $180,000 and a basis of $250,000 in the property received. d.) The tax consequences to Teal Corporation would again be the same as in a.) Grace would have a capital gain of $180,000 and a basis of $250,000 in the property received. e.) Assuming that Grace is an individual, she would choose the qualifying stock redemption. If the distribution is a dividend, she would have dividend income of $250,000. Her basis in the property received is the same whether the transaction is a dividend or a qualifying stock redemption. If Grace is a corporation, it would prefer the distribution be a dividend because only 20% of the dividend will be taxed. Teal Corporation would have no preference because the tax consequences from the transaction are the same under each option.
39.) a.) The payment qualifies for stock redemption treatment. Julio’s tax liability would be $52,500 ($500,000-$150,000=$350,000*15%=$52,500). b.) The payment does not qualify for stock redemption treatment. Julio’s tax liability would be $75,000 ($500,000*15%).
43.)
38.) a.) Teal Corporation would have a taxable gain of $70,000 on the property distribution ($250,000-$180,000). The gain would be ordinary or capital depending on the type of property distributed. The E&P of Teal would increase by $70,000 and decrease by $250,000. Teal’s E&P also would be decreased by the amount of tax due on the gain. Grace would have dividend income of $250,000 and a basis in the property of $250,000. b.) The tax consequences to Teal Corporation would be the same as listed above, but Grace would have dividend income of $250,000, but only 20% of the $250,000, or $50,000, would be taxed to Grace. Because Grace has a 20% or more ownership interest in Teal Corporation, the 80% dividends received deduction is applicable. Grace Corporation would have a basis of $250,000 in the property. c.) The tax consequences to Teal Corporation would again be the same as in a.) Grace would have a capital gain of $180,000 and a basis of $250,000 in the property received. d.) The tax consequences to Teal Corporation would again be the same as in a.) Grace would have a capital gain of $180,000 and a basis of $250,000 in the property received. e.) Assuming that Grace is an individual, she would choose the qualifying stock redemption. If the distribution is a dividend, she would have dividend income of $250,000. Her basis in the property received is the same whether the transaction is a dividend or a qualifying stock redemption. If Grace is a corporation, it would prefer the distribution be a dividend because only 20% of the dividend will be taxed. Teal Corporation would have no preference because the tax consequences from the transaction are the same under each option.
39.) a.) The payment qualifies for stock redemption treatment. Julio’s tax liability would be $52,500 ($500,000-$150,000=$350,000*15%=$52,500). b.) The payment does not qualify for stock redemption treatment. Julio’s tax liability would be $75,000 ($500,000*15%).
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