In: Accounting
50. Falzone Company has two shareholders, Rita and Sal Corporation. Rita acquired her 300 shares in 2003 for $30,000 and Sal Corporation acquired its 200 shares in 1999 for $15,000. On August 2, 2013, Falzone Company sold one of its businesses that it had held since 1999. Due to this sale, Falzone Company redeemed 50 shares from each shareholder in exchange for $20,000 each. Falzone’s E&P at the time of the redemption was $250,000. What are the tax consequences of this transaction to Rita and Sal Corporation?
Under IRS and US taxation code – redemption treated as an exchange will be taxable only when the amount realised on redemption exceeds the redeemed shareholder’s historic stock basis. In such case taxation is done based on E & P of the company.
In the present case
Shareholder - Rita
Shareholder – Sal corporation
It can be seen in the both cases of redemption, the company is incurring losses and such losses can be depleted against the E& P of the company over a period of time.