Aggie Corporation made a distribution of $535,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100 shares (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 $137 per share. Rusty's tax basis in the shares was $32 per share. Aggie had total E&P of $8,020,000 at the time of the distribution. a. What are the amount and character (capital gain or dividend) of any income or gain recognized by Rusty as a result of the partial liquidation? per share

Aggie Corporation made a distribution of $535,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100 shares (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 $137 per share. Rusty's tax basis in the shares was $32 per share. Aggie had total E&P of $8,020,000 at the time of the distribution. a. What are the amount and character (capital gain or dividend) of any income or gain recognized by Rusty as a result of the partial liquidation? per share

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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Van and Floyd formed a corporation during the year. In exchange for one-half of the outstanding shares of the corporation's voting stock, which had a total par value of $400, 000, Van contributed property with a fair market value of $200,000 for which he paid $300,000 in a prior year. Floyd contributed property with a fair market value of $200,000 for which he paid $100,000 in a prior year and received the other one-half of the outstanding stock. How much gain or loss will Van and Floyd recognize on the transfer of property? A. Van will recognize $100, 000 loss; Floyd will recognize $100, 000 gain. B. No gain or loss to either Van or Floyd. C. Van will recognize $0 loss; Floyd will recognize $100,000 gain. D. None of the answers are correct.
Bedrock Incorporated is owned equally by Barney and his wife Betty, each of whom holds 840 shares in the company. Betty wants to reduce her ownership in the company, and it was decided that the company will redeem 420 of her shares for $25, 400 per share on December 31 of this year. Betty's tax basis in each share is $7, 200. Bedrock has current E&P of $ 10, 580,000, and accumulated E&P was $50, 780,000 at the beginning of the year. a. What is the amount and character (capital gain or dividend) recognized by Betty as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? b. Given your answer to part (a), what is Betty's income tax basis in the remaining 420 shares she owns in the company? c. By what amount does Bedrock reduce its E&P because of the redemption? d. Can Betty argue that the redemption is "not essentially equivalent to a dividend" and should be treated as an exchange?
Jack, the sole shareholder of Rettig Corporation, sold his stock to Jill on July 1 of this year for $80,000. Jack's stock basis at the beginning of the year was $50,000. Rettig made a $20,000 cash distribution to Jack immediately before the sale, while Jill received a $40,000 cash distribution from Rettig on November 1. As of the beginning of the current year, Rettig had $12,000 in accumulated E & P, while current E & P (before distributions) was $15,000. What is the character of Jack's distribution (amount of dividend, return of capital, capital gain)? What is the character of Jill's distribution (amount of dividend, return of capital, capital gain)? What is Jack's recognized gain on the sale of his stock?
Dave and his friend Stewart each owns 50 percent of KBS. During the year, Dave received $96,000 compensation for services he performed for KBS during the year. He performed a significant amount of work for the entity, and he was heavily involved in management decisions for the entity (he was not a passive investor in KBS). After deducting Dave's compensation, KBS reported taxable income of $38,400. How much FICA and/or self-employment tax is Dave required to pay on his compensation and his share of the KBS income if KBS is formed as a C corporation, an S corporation, or a limited liability company (taxed as a partnership) (ignore the 0.9 percent additional Medicare tax)? How much FICA tax would the entity be required to pay on the compensation paid to Dave? Note: Do not round any percentage calculations. Round other intermediate calculations and final answers to the nearest whole dollar amount. C Corporation S Corporation Limited liability company FICA Tax that Dave pays FICA Tax that…
Jack, an individual calendar-year taxpayer engaged in the following transactions: Purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1 Purchased an additional 100 shares of Core Co. common stock for $13,000 on December 30, Year 1 On January 3, Year 2, sold for $10,000 the 100 shares purchased on December 15th Based on these transactions, what amount of loss from the sale of Core's stock is deductible on Jack's Year 1 and Year 2 income tax returns? Year 1 $0; Year 2 $3,000 Year 1 $0; Year 2 $5,000 Year 1 $0; Year 2 $2,000 Year 1 $0; Year 2 $0
M is the sole shareholder of N Corporation. For the past five years, N has reported little or no taxable income as a result of paying M a salary of $500,000 per year. During a recent IRS audit, the revenue agent determined that M's educational and business experience, and his time devoted to managing N, justified a salary of only $200,000. Thus, the agent recharacterized $300,000 of the payments from the corporation as a dividend. Assume that all dividends are taxed to the individuals at a 20% tax rate. What are the annual tax savings to M as a result of the constructive dividend treatment? Calculate the change in M's income tax liability as a result of this change. Assume that M's marginal tax rate on ordinary income is 37 percent. (Ignore any payroll tax consequences.)
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Rock Corporation distributed property with a fair market value of $100,000 and an adjusted basis of $70,000 to Ann, a shareholder of Rock Corporation. Prior to the distribution, Rock Corporation had a deficit in accumulated earnings and profits of $200,000 and current earnings and profits of $20,000. Ann has stock basis in Rock Corporations of $90,000. Assume that Ann is an individual in the 37% tax bracket. Determine Ann’s tax liability for this distribution.
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In the current year, Tom , Jay , and Dana form Ares Corporation. Tom contributes land (a capital asset) having a $62,500 FMV (fair market value) in exchange for 165 shares of stock. He purchased the land three years ago for $65,000. Jay contributes machinery (Sec. 1231 property purchased four years ago) having a $115,000 adjusted basis and a $37,500 FMV in exchange for 105 shares of Ares stock. Dana contributes services worth $25,000 in exchange for 60 shares of Ares stock.
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Cameron owns all the stock of Connor Corporation, an S corporation. Cameon's basis for the 1,000 shares is $355,000. On June 25 of the current year (assume a non-leap year), Cameron gifts 100 shares of stock to his younger brother Chase, who has been working in the business for one year. Conner Corporation reports $350,000 of ordinary income for the current year. Requirement: What amount of income is allocated to Comeron? To Chase? (Use a 365-day year for computations. Do not round intermediary calculations. Only round the amount you enter in the input field to the nearest dollar.) Question content area bottom Part 1 Ordinary income allocated Cameron Chase