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A, an individual owns 5 shares in M Corp and Z Corp owns 5 shares of M Corp. There are a total of 10 M Corp shares outstanding. Z's basis in M Corp shares is $10,000. M Corp has E&P of $500,000. M Corp wants to distribute to Z Corp a piece of Land FMV $250,000 and basis $50,000. Z Corp wants to redeem some of its shares for the distribution of the land. Z Corp desires that this redemption qualify as a sale under the safe harbor rules of IRC 302(b)(2). Z Corp wants to redeem the fewest shares possible, but still meet the safe harbor rules. (A) If Z Corp redeems 2 shares would the safe harbor rules of IRC 302(b)(2) have been met? Show your computation to prove your response. (B)What is the tax effect to Z Corp if the redemption meets the safe harbor rules under 302(b)(2) and is treated as sale? (C)Why would Z Corp want capital gain treatment rather than dividend treatment?

A, an individual owns 5 shares in M Corp and Z Corp owns 5 shares of M Corp. There are a total of 10 M Corp shares outstanding. Z's basis in M Corp shares is $10,000. M Corp has E&P of $500,000. M Corp wants to distribute to Z Corp a piece of Land FMV $250,000 and basis $50,000. Z Corp wants to redeem some of its shares for the distribution of the land. Z Corp desires that this redemption qualify as a sale under the safe harbor rules of IRC 302(b)(2). Z Corp wants to redeem the fewest shares possible, but still meet the safe harbor rules. (A) If Z Corp redeems 2 shares would the safe harbor rules of IRC 302(b)(2) have been met? Show your computation to prove your response. (B)What is the tax effect to Z Corp if the redemption meets the safe harbor rules under 302(b)(2) and is treated as sale? (C)Why would Z Corp want capital gain treatment rather than dividend treatment?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A, an individual owns 5 shares in M Corp and Z Corp owns 5 shares of M Corp. There are a total of 10 M Corp shares outstanding. Z's basis in M Corp shares is $10,000. M Corp has E&P of $500,000. M Corp wants to distribute to Z Corp a piece of Land FMV $250,000 and basis $50,000. Z Corp wants to redeem some of its shares for the distribution of the land. Z Corp desires that this redemption qualify as a sale under the safe harbor rules of IRC 302(b)(2). Z Corp wants to redeem the fewest shares possible, but still meet the safe harbor rules. (A) If Z Corp redeems 2 shares would the safe harbor rules of IRC 302(b)(2) have been met? Show your computation to prove your response. (B)What is the tax effect to Z Corp if the redemption meets the safe harbor rules under 302(b)(2) and is treated as sale? (C) Why would Z Corp want capital gain treatment rather than dividend treatment?
Transcribed Image Text:A, an individual owns 5 shares in M Corp and Z Corp owns 5 shares of M Corp. There are a total of 10 M Corp shares outstanding. Z's basis in M Corp shares is $10,000. M Corp has E&P of $500,000. M Corp wants to distribute to Z Corp a piece of Land FMV $250,000 and basis $50,000. Z Corp wants to redeem some of its shares for the distribution of the land. Z Corp desires that this redemption qualify as a sale under the safe harbor rules of IRC 302(b)(2). Z Corp wants to redeem the fewest shares possible, but still meet the safe harbor rules. (A) If Z Corp redeems 2 shares would the safe harbor rules of IRC 302(b)(2) have been met? Show your computation to prove your response. (B)What is the tax effect to Z Corp if the redemption meets the safe harbor rules under 302(b)(2) and is treated as sale? (C) Why would Z Corp want capital gain treatment rather than dividend treatment?
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