chapter_6_solutions - 6-1Chapter 6 Solutions Corporations:...

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Unformatted text preview: 6-1Chapter 6 Solutions Corporations: Redemptions & liquidations (2012) updated: August 8, 2011 38. a. Teal Corporation would have a taxable gain of $70,000 on the property distribution [$250,000 (fair market value) $180,000 (basis in property)]. The gain would be ordinary or capital depending on the type of property distributed. The E & P of Teal Corporation would be increased by $70,000 (the amount of gain to Teal) and decreased by $250,000 (the FMV of the property distributed). Teals E & P also would be decreased by the amount of tax due on the gain recognized. 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 in option a. Grace Corporation would have dividend income of $250,000, but only 20% of the $250,000, or $50,000, would be taxed to Grace. Because Grace Corporation 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 be the same as in option a. Grace would have a capital gain of $180,000 [$250,000 (value of the property) $70,000 (basis in stock)] and a basis of $250,000 in the property received. d. The tax consequences to Teal Corporation would be the same as in option a. Grace Corporation would have a capital gain of $180,000 [$250,000 (value of the property) $70,000 (basis in stock)] and a basis of $250,000 in the property received. e. Assuming Grace is an individual, she would choose the qualifying stock redemption (option c.). If the distribution is a qualifying stock redemption, she has a capital gain of $180,000. If the distribution is a dividend, as in option a., 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 that the distribution be a dividend because only 20% of the dividend would be taxed (option b.). Teal Corporation itself would have no preference because the tax consequences from the transaction are the same under each option. pp. 6-3, 6-4, 6-12, 6-13, and 6-28 39. a. Julios tax liability would be $52,500, computed as follows: $500,000 (amount realized) $150,000 (basis in the 600 shares redeemed) = $350,000 (long-term capital gain) 15% = $52,500. b. Julios tax liability would be $75,000, computed as follows: $500,000 (dividend) 15% = $75,000. Example 1 40. a. Tax liability for a corporate shareholder would be $119,000, computed as follows: $500,000 (amount realized) $150,000 (basis in the stock) = $350,000 (long-term capital gain) 34% = $119,000. Corporations do not receive a preferential tax rate on long-term capital gains....
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chapter_6_solutions - 6-1Chapter 6 Solutions Corporations:...

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