Plainwell Ice Cream Corporation (Plainwell), a premium ice cream manufacturer, has had a very profitable year. To share its profits with its two shareholders, Waffle Cone Corporation and Luis, it distributes cash of $200,000 to Waffle Cone and real estate worth $300,000 (adjusted basis of $20,000) to Luis (a married taxpayer filing a joint return). The real estate is subject to a mortgage of $100,000, which Luis assumes. The distribution is made on December 31, Plainwell's year-end. Plainwell has had both good and bad years in the past. More often than not, however, it has lost money. Despite this year's record profits, the GAAP-based balance sheet for Plainwell indicates a year-end deficit in retained earnings. Consequently, the distribution of cash and land is treated as a liquidating distribution for financial reporting purposes, resulting in a reduction of Plainwell's paid-in capital account. The tax consequences of the distributions to the corporation and its shareholders depend on a variety of factors that are not directly related to the financial reporting treatment. Identify these factors, and explain the tax effects of the distributions to both Plainwell Ice Cream Corporation and its two shareholders.
Plainwell Ice Cream Corporation (Plainwell), a premium ice cream manufacturer, has had a very profitable year. To share its profits with its two shareholders, Waffle Cone Corporation and Luis, it distributes cash of $200,000 to Waffle Cone and real estate worth $300,000 (adjusted basis of $20,000) to Luis (a married taxpayer filing a joint return). The real estate is subject to a mortgage of $100,000, which Luis assumes. The distribution is made on December 31, Plainwell's year-end. Plainwell has had both good and bad years in the past. More often than not, however, it has lost money. Despite this year's record profits, the GAAP-based balance sheet for Plainwell indicates a year-end deficit in retained earnings. Consequently, the distribution of cash and land is treated as a liquidating distribution for financial reporting purposes, resulting in a reduction of Plainwell's paid-in capital account. The tax consequences of the distributions to the corporation and its shareholders depend on a variety of factors that are not directly related to the financial reporting treatment. Identify these factors, and explain the tax effects of the distributions to both Plainwell Ice Cream Corporation and its two shareholders.
SWFT Essntl Tax Individ/Bus Entities 2020
23rd Edition
ISBN:9780357391266
Author:Nellen
Publisher:Nellen
Chapter18: Comparative Forms Of Doing Business
Section: Chapter Questions
Problem 28P
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Transcribed Image Text:Plainwell Ice Cream Corporation (Plainwell), a premium ice cream manufacturer, has had a very profitable year.
To share its profits with its two shareholders, Waffle Cone Corporation and Luis, it distributes cash of $200,000 to
Waffle Cone and real estate worth $300,000 (adjusted basis of $20,000) to Luis (a married taxpayer filing a joint
return). The real estate is subject to a mortgage of $100,000, which Luis assumes. The distribution is made on
December 31, Plainwell's year-end.
Plainwell has had both good and bad years in the past. More often than not, however, it has lost money. Despite
this year's record profits, the GAAP-based balance sheet for Plainwell indicates a year-end deficit in retained
earnings. Consequently, the distribution of cash and land is treated as a liquidating distribution for financial
reporting purposes, resulting in a reduction of Plainwell's paid-in capital account.
The tax consequences of the distributions to the corporation and its shareholders depend on a variety of factors
that are not directly related to the financial reporting treatment. Identify these factors, and explain the tax effects
of the distributions to both Plainwell Ice Cream Corporation and its two shareholders.
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