Cerulean Corporation has two equal shareholders, Marco and Avery. Marco acquired his Cerulean stock three years ago by transferring property worth $700,000 (basis of $300,000) for 70 shares of the stock. Avery acquired 70 shares in Cerulean Corporation two years ago by transferring property worth $660,000 (basis of $110,000). Cerulean Corporation's accumulated E & P as of January 1 (current year) is $350,000. On March 1 of the current year, the corporation distributed to Marco property that is worth $120,000, with a basis to Cerulean of $50,000. It distributed cash of $220,000 to Avery. On July 1 of the current year, Avery sold her stock to Harpreet for $820,000. On December 1 of the current year, Cerulean distributed cash of $90,000 each to Harpreet and Marco. Regarding this tax situation, classify each of the following as "Yes" a relevant tax issue or "No" not a tax issue. What basis do Marco and Avery have in their stock in Cerulean Corporation after their initial transfers for stock? b. C. d. f. 9. Does Avery's transfer qualify under 5 351 of the Code as a nontaxable exchange? How do the distributions to Marco and to Avery affect Cerulean's E & P? What is Avery's basis in her stock when she sells it to Harpreet? How are Marco and Harpreet taxed on the $90,000 distribution to each? How much of the distribution is currently deductible by the corporation? How is Cerulean Corporation taxed on the property distribution to Marco?
Cerulean Corporation has two equal shareholders, Marco and Avery. Marco acquired his Cerulean stock three years ago by transferring property worth $700,000 (basis of $300,000) for 70 shares of the stock. Avery acquired 70 shares in Cerulean Corporation two years ago by transferring property worth $660,000 (basis of $110,000). Cerulean Corporation's accumulated E & P as of January 1 (current year) is $350,000. On March 1 of the current year, the corporation distributed to Marco property that is worth $120,000, with a basis to Cerulean of $50,000. It distributed cash of $220,000 to Avery. On July 1 of the current year, Avery sold her stock to Harpreet for $820,000. On December 1 of the current year, Cerulean distributed cash of $90,000 each to Harpreet and Marco. Regarding this tax situation, classify each of the following as "Yes" a relevant tax issue or "No" not a tax issue. What basis do Marco and Avery have in their stock in Cerulean Corporation after their initial transfers for stock? b. C. d. f. 9. Does Avery's transfer qualify under 5 351 of the Code as a nontaxable exchange? How do the distributions to Marco and to Avery affect Cerulean's E & P? What is Avery's basis in her stock when she sells it to Harpreet? How are Marco and Harpreet taxed on the $90,000 distribution to each? How much of the distribution is currently deductible by the corporation? How is Cerulean Corporation taxed on the property distribution to Marco?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Cerulean Corporation's Shareholder Tax Situation: Educational Overview**
Cerulean Corporation has two equal shareholders, Marco and Avery. The following overview examines the tax implications relating to their stock and distributions.
**Stock Acquisition:**
- **Marco** acquired his shares three years ago through a property transfer worth $700,000 (cost basis: $300,000) for 70 shares.
- **Avery** acquired 70 shares two years ago using property valued at $660,000 (cost basis: $110,000).
**Current Financial Overview:**
- Cerulean Corporation's accumulated Earnings and Profits (E & P) as of January 1 (current year): $350,000.
- On March 1, the corporation distributed property to Marco valued at $120,000 (basis: $50,000).
- Distributed cash of $220,000 to Avery on the same date.
- Avery sold her stock to Harpreet for $820,000 on July 1.
- On December 1, the corporation distributed $90,000 in cash to Harpreet and Marco.
**Tax Classification:**
Evaluate each situation as "Yes" for a relevant tax issue or "No" for not a tax issue:
a. What basis do Marco and Avery have in their stock in Cerulean Corporation after their initial transfers for stock?
b. Does Avery’s transfer qualify under § 351 of the Code as a nontaxable exchange?
c. How do the distributions to Marco and to Avery affect Cerulean’s E & P?
d. What is Avery’s basis in her stock when she sells it to Harpreet?
e. How are Marco and Harpreet taxed on the $90,000 distribution to each?
f. How much of the distribution is currently deductible by the corporation?
g. How is Cerulean Corporation taxed on the property distribution to Marco?
This analysis will assist in understanding the implications of stock transfers and distributions for both the shareholders and the corporation.
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