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CorpTax-Slides for Chapter 3.f13

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Unformatted text preview: ributed Current E&P—$4,000 Accumulated E&P—$20,000 Dividend Return of capital Capital gain 2nd Distribution $10,000 $10,000 $30,000 $30,000 ¼ $ 1,000 ¾ $ 3,000 9,000 9,000 11,000 11,000 $10,000 $10,000 $14,000 $14,000 $10,000 $10,000 $6,000 $6,000 11 Property Distributions—General Rules Effect on the distributing corporation Determination of taxable gain or loss Gain on appreciated property distributed is recognized Gain = FMV - tax basis No loss is recognized Determination of E&P Current E&P is increased by the E&P gain created by the Current property distributed property Gain = FMV - E&P basis E&P is reduced by the FMV of the property distributed but not E&P below zero below 12 Property Distributions—General Rules (Cont’d) Effect on the Recipient Amount distributed = FMV of the property distributed Basis = FMV of the property distributed 13 Example Corporation X distributes a depreciable machine to X’s Corporation sole shareholder, Individual A The machine has a fair market value of $30,000 The machine has a tax basis of $25,000 and an E&P basis of $27,000 of X has accumulated E&P at the beginning of the year of has $20,000 $20,000 X has current E&P, before considering any effects of the has property distribution, of $5,000 property X also has a tax rate of 15% also A has a basis in the X stock of $20,000 has Determine all of the tax consequences of the distribution Determine to X and A to 14 Solution X Corporation...
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