Question

In: Accounting

Green, Inc., a C corporation, distributes a tract of land held as an investment (FMV =...

Green, Inc., a C corporation, distributes a tract of land held as an investment (FMV = $500,000, basis = $220,000) and its mortgage of $550,000 to Susan at the end of the year. Green, Inc. has a current E&P of $190,000 for the year, and started the year an accumulated E & P of $60,000. Green’s marginal tax rate is 21%. Susan has an individual marginal tax rate of 33% and both a dividend and a long-term capital gains tax rate of 15%. Susan owns 200 of Green’s 1,000 shares outstanding and her basis in her Green stock is $20,000. Susan has held her stock for two years. The distribution does not qualify as a stock redemption, but would be classified as a qualified dividend.

What is Green’s recognized gain on the distribution? __________________

What is the increase in Green’s tax liability as a result of the distribution?

__________________

What is the amount of Susan’s distribution? __________________

How much of the distribution is classified as a dividend? __________________

How much of the distribution is classified as a return of capital? __________________

How much of the distribution is taxed as a capital gain? __________________

What is the increase in Susan’s tax liability as a result of the distribution? __________________

What is Green’s ending E&P (after the distribution)? __________________

What is Susan’s basis in the land? __________________

What is Susan’s ending basis in her Green stock? __________________

Expert Solution

FIRST 4 SUB-QUESTIONS WILL BE ANSWERED:

What is Green’s recognized gain on the distribution?

= Liability on investment+Basis of shares exchanged-FMV of the Investment

= $550,000 – [($20,000/200) x 50) - $500,000

= $55,000

What is the increase in Green’s tax liability as a result of the distribution?

= Recognized gain x marginal tax rate

=$55,000 x 0.21

= $11,550

C. What is the amount of Susan’s distribution?

= Amount of Mortgage+Basis of shares exchanged

= 550,000 + 5,000

= $555,000

D. How much of the distribution is classified as a dividend?

Since the distribution is at loss to the investor, no amount will be considered as dividend.

ekkarill92 answered 9 months ago

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