In: Accounting
John Corporation was organized ten (10) years ago as a retail Sporting Goods operation. Eight (8) years ago, John Corporation began to operate a separate Oil Refining division. Due to a slow down in the oil business, John Corporation discontinues the Oil Refining division. John Corporation sells the assets of the Oil Refining division for $6,400,000 and distributes the proceeds equally to its two (2) shareholders, Naomi, an individual, and Willie Corporation. Both Naomi and Willie Corporation have a basis is the redeemed stock of $800,000 each which both acquired ten (10) years ago. John Corporation continues to operate the retail Sporting Goods operation. John Corporation has Earnings And Profits (E&P) of $6,000,000 at the time of the distribution. As a result of the distribution, which of the following is the correct tax treatment for Willie Corporation?
Willie Corporation has the long term capital gain of $2,400,000.
Explanation:- Willie Corporation buy the stock 10 years ago so that will be it's capital asset which is held for long term, so it is a long term capital asset.
Proceeds received from John Corporation= $3,200, 000
Cost price of stock = $8,00,000
Long Term Capital Gain = $2,400,000