50. Falzone Company has two shareholders, Rita and Sal Corporation. Rita acquired her 300 shares in...

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?

Solutions

Expert Solution

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

Issued 300 shares in 2003 for $ 30000.
Value per share in 2003 = $30000 / 300 = $100
No of shares redeemed in 2013 50 shares
Historic cost of redeemed shares = 50 shares x $100 = $5000
Value of redemption of 50 shares = $20000
Loss on redemption to company = $20000- $5000 = $15000

Shareholder – Sal corporation

Issued 200 shares in 1999 for $ 15000.
Value per share in 1999 = $15000 / 200 = $75
No of shares redeemed in 2013 50 shares
Historic cost of redeemed shares = 50 shares x $75 = $3750
Value of redemption of 50 shares = $20000
Loss on redemption to company = $20000- $3750 = $16250

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.

ekkarill92 answered 2 years ago

Next > < Previous

Related Solutions

Grant Corporation (C Corp) has two shareholders: Hugh (owns 50%) and Bullocks Corporation (50%). Grant Corporation makes $75,000...

Grant Corporation (C Corp) has two shareholders: Hugh (owns 50%) and Bullocks Corporation (50%). Grant Corporation makes $75,000 cash distribution to each shareholder on December 31, 2019. Hugh is an individual but Bullocks Corporation is a C Corporation. Hugh’s stock basis is $20,000 and Bullocks’ stock basis is $40,000. What are the tax consequences to Hugh and Bullocks on the distributions for each of the separate situations? a. Current E&P is positive $40,000 and Accumulated E&P is negative $15,000. b. Current E&P is negative $17,000 and Accumulated...

Company X's total outstanding shares are 1000 shares, with 400 shareholders A, 300 B, 150 C,...

Company X's total outstanding shares are 1000 shares, with 400 shareholders A, 300 B, 150 C, 100 D and 50 E, respectively. C held a shareholders' meeting to appoint directors, and the agenda was presented as candidates for directors by F,G,H and B, professional managers recommended by A. 1. Is it possible for B to exercise its voting rights on the agenda of the shareholders'meeting for the appointment of this director? At the shareholders' meeting, B,F,G and H were all...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $6,600, and Clyde owns the remaining 40 shares with a basis of $15,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. a. Getaway redeems 10 of Bonnie’s shares for $5,000. Getaway has $26,000 of E&P at year-end and Bonnie is...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $3,000, and Clyde owns the remaining 40 shares with a basis of $13,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. (Leave no answer blank. Enter zero if applicable.) Required: 1. Getaway redeems 10 of Bonnie’s shares for $3,000. Getaway...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $8,800, and Clyde owns the remaining 40 shares with a basis of $17,500. At year end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of these stock redemption transactions qualify for sale or exchange treatment. A)Getaway redeems 10 of Bonnie’s shares for $3,000. Getaway has $20,000 of E&P at year end and Bonnie is unrelated...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 55 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 55 shares with a basis of $4,400, and Clyde owns the remaining 45 shares with a basis of $16,500. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. (Leave no answer blank. Enter zero if applicable.) Required: Getaway redeems 5 of Bonnie’s shares for $2,000. Getaway has...

Jamya and Manu are the shareholders of Buffalo Corporation an S Corporation. They each own 50%...

Jamya and Manu are the shareholders of Buffalo Corporation an S Corporation. They each own 50% of Buffalo Corporation. In Year 1, Jamya and Manu each received distributions of $30,000 from Buffalo Corporation. In Year 2, they received distributions each of $50,000. Buffalo Corporation (an S Corporation) Income Statement, Dec. 31, 20x8 and 20X9 20X8(Year 1) 20X9(Year 2) Sales revenue $600,000 $860,000 Cost of goods sold (80,000) (120,000) Salary to shareholders Manu and Jamya (80,000) (160,000) Employee wages (50,000) (100,000)...

Greyson Corporation has 5,000 shares of $50 par value common stock outstanding. The company conducts the...

Greyson Corporation has 5,000 shares of $50 par value common stock outstanding. The company conducts the following treasury stock transactions: Purchased 400 shares of its common stock at $62 Sold 60 treasury shares at $68 Sold 120 treasury shares at $60 Sold 100 shares at $58 Required Prepare the journal entries necessary to record these transactions.

Corporation P acquired the stock of Corporation T for $40 Million from T shareholders. No Section...

Corporation P acquired the stock of Corporation T for $40 Million from T shareholders. No Section 338 election was made. Corporation T has assets with a fair market value of $25 Million and an adjusted basis of $22 Million. Corporation T also has a net operating loss carryover of $10 Million. The federal long term tax exempt rate at the date of acquisition is 4%. A) What is P’s basis in T’s assets and what is the annual limitation on...

XXX Corporation acquired 80% of the outstanding shares of United Company on June 1, 2020 for...

XXX Corporation acquired 80% of the outstanding shares of United Company on June 1, 2020 for P3,517,500. United Company’s stockholders equity components at the end of this year as follows: Ordinary shares, P100 par, P1,500,000, Share premium P675,000 and Retained earnings P1,335,000. Non-controlling interest is measured at fair value and the fair value is P705,000. The assets of united were fairly valued, except for inventories, which are overstated by P66,000 and equipment which was understated by P90,000. Remaining useful life...

Subjects