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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