CorpTax-Slides for Chapter 3.f13

# Plus 27000 27000 3000 less tax liability 750 750 7250

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Unformatted text preview: Taxable income (\$30,000 - \$25,000) = \$5,000 (probably ordinary) Tax liability (\$5,000 x 15%) = \$750 Accumulated E&P \$20,000 Current E&P Current E&P before distribution \$5,000 Plus: E&P gain (\$30,000 Plus: \$27,000) \$27,000) \$3,000 Less: Tax liability (750) (750) 7,250 7,250 E&P available for distributions \$27,250 Less: FMV of distribution (30,000) (30,000) Ending E&P 0 15 Solution (Cont’d) Individual A Amount distributed—\$30,000 (FMV) Character of the distribution Dividend—\$27,250 Return of capital—\$2,750 Basis in machine—\$30,000 (FMV) Remaining stock basis—\$17,250 (\$20,000 - \$2,750) 16 Property Distributions—Property Subject to Liabilities Effect on the distributing corporation Determination of taxable gain or loss Gain on appreciated property is recognized Gain = FMV - tax basis No loss is recognized Determination of E&P Current E&P is increased by E&P gain Gain = FMV - E&P basis E&P is reduced by the net FMV of the property distributed Net FMV = FMV - liability 17 Property Distributions—Property Subject to Liabilities (Cont’d) Effect on the recipient Amount distributed = Net FMV of the property received Basis = FMV of the property received 18 Example Assume the same facts as in the previous Example Assume except the machine is encumbered by a mortgage of \$10,000 Determine all of the tax consequences of the distribution to X and A distribution 19 Solution X Corporation Taxable income (\$30,000 - \$25,000) = \$5,000 (probably ordinary) Tax liability (\$5,000 x 15%) = \$750 Accumulated E&P \$20,000 Current E&P Current E&P before distribution Plus: E&P gain (\$30,000 Plus: \$27,000) \$27,000) Less: Tax liability \$5,000 3,000 3,000 (750) (750) 7,250 7,250 E&P available for distributions \$27,250 Less: FMV of distribution (\$30,000 Less: \$10,000) \$10,000) (20,000) (20,000) Ending E&P \$7,250 \$7,250 20 Solution (Cont’d) Individual A Amount distributed—\$20,000 (Net FMV: \$30,000 Amount \$10,000) \$10,000) Character of the distribution Dividend—\$20,000 Basis in machine—\$30,000 (FMV) 21 Any Questions on End-of-Chapter Problems? 22...
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