The total value of the distribution is $92,000 (4 x $23,000). Vanguard must recognize gain of $24,000 ($92,000 - $68,000). Each of the shareholders recognizes $23,000 dividend income, the value of their distribution (assuming the corporation has sufficient E&P). 42. [LO 9.4] Stock Dividend Solution:$400 gain. Adjusted basis of the shares = $4,400/110 share = $40 per share. $800 – (10 x $40) = $400 gain on the sale. 43. [LO 9.4] Stock Rights Solution:$9.375. Each right has a value of $3 ($13 - $10). $30 value of ten rights/$130 value of the ten shares = 23%; thus, basis must be allocated to the rights. The basis in the ten rights is $30/$160 total x $50 = $9.375. 44. [LO 9.5] Earnings & Profits Solution: a. Adam $6,000 dividend; Eva $9,000 dividend (No corporate consequences) b.Adam $10,000 dividend; Eve $15,000 dividend (No corporate consequences) c.Adam $12,000 dividend; $2,000 return of capital; Eve $18,000 dividend; $3,000 return of capital (No corporate consequences) d.Adam $12,000 dividend; Eve $18,000 dividend (No corporate consequences) e.For simplicity, July 1 is assumed to be one-half year so that a $2,500 deficit has accrued by July 1. Thus, Adam has a dividend of $3,000 and Eve a dividend of $4,500. [On a daily basis it would actually be 181/365 x $5,000 CE&P deficit = $2,479 deficit up to the day before the distribution. $10,000 AE&P - $2,479 deficit in CE&P = $7,521 positive E&P available to cover the distribution. Thus, Adam has a dividend of $3,008 and Eve a dividend of $4,513.] f.Adam $4,000 dividend; Eve $6,000 dividend (No corporate consequences) g.Clarington recognizes $4,000 gain on the distribution increasing CE&P to $8,000. Adam has a $3,200 dividend and Eve a $4,800 dividend. h.Clarington cannot recognize the $2,000 loss on the distribution of the stock. The distribution reduces both CE&P and AE&P to zero, limiting the total dividend to $7,000. Adam has a $2,800 dividend and a $400 return of capital while Eve has a $4,200 dividend and a $600 return of capital on the $8,000 distribution. (Note that the corporation will reduce its E&P by the basis of the property distributed, but cannot reduce E&P below zero.) 45. [LO 9.5] Redemptions Solution:a. $15,000 dividend. 800/1500 = 53.3% before redemption ownership; 53.3% x 80% = 42.67% after redemption ownership; 650/1350 = 48.15% which is not less than 80% of the original ownership. Thus, Sheri will have to treat the $15,000 received as dividend income. b. $24,000 capital gain. 500/1,200 = 41.67% which is less than 80% of her original ownership of 53.3% (800/1500). Thus, Sheri will receive sale treatment. Her $24,000 capital gain is the difference between the $30,000 received and her basis in the 300 shares of $6,000 (300 x $20).
Chapter 9: Taxation of Corporations 9 c. Sheri will have dividend income (equal to the full amount received) in both instances because her father’s shares are attributed to her so she owns 100% of the shares both before and after the sales, regardless of the number sold. 46. [LO 9.5] Partial Liquidation Solution:a. Beacon will have a gain of $600,000 ($1,500,000 - $900,000) on the sale of the assets on which it will pay a tax of $204,000 ($600,000 x 34%). The after-tax proceeds are $1,296,000 ($1,500,000 - $204,000). When it distributes the $648,000 ($1,296,000 x 50%) to the shareholders, they will be able to treat this as a sale because it qualifies as a partial liquidation. The total gain is $198,000 [$648,000 – ($45 x 10,000)]. Assuming the shareholders have all held their stock for more than one year, they could pay taxes at rates from 0% to 20% (excluding any surtax) based on their other income; however, most will likely pay the tax at the 15% rate for a tax of $29,700 ($198,000 x 15%). (Note: any corporate
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