Question

In each of the following situations complete the blanks

Distribution (cash)	S/H Basis in Stock	Corporate E&P	Dividend	Return of Capital	Capital Gain
100,000	20,000	500,000
100,000	500,000	20,000
600,000	20,000	500,000
600,000	500,000	20,000
100,000	800,000	500,000
100,000	800,000	20,000
600,000	800,000	500,000

XYZ Corporation has one shareholder. The shareholder’s tax basis in his shares is $100,000. Corporate E&P BEFORE the effects of any distribution is $100,000. The corporation distributes the following property in INDEPENDENT situations. Explain the tax effect to the corporation and to the sole shareholder.

First, the corporation distributes land with a FMV of $200,000 and a tax basis to the corporation of $100,000.

Second, the corporation distributes land with a FMV of $100,000 and a tax basis to the corporation of $200,000.

Answer 1

				Return of Capital
Distribution (cash)	S/H Basis in Stock	Corporate E&P	Dividend	Tax free return of basis	Capital Gain	Explanation
100,000	20,000	500,000	100000	0	0
100,000	500,000	20,000	20000	80000	0
600,000	20,000	500,000	500000	20000	80000	(Return of capital 100000-Stock basis 20000)
600,000	500,000	20,000	20000	500000	80000	(Return of capital 580000-Stock basis 500000)
100,000	800,000	500,000	100000	0	0
100,000	800,000	20,000	20000	80000	0
600,000	800,000	500,000	500000	100000	0

First, the corporation distributes land with a FMV of $200,000 and a tax basis to the corporation of $100,000.

So, FMV is greater than XYZ's tax basis in the property

So, XYZ must recognize the distribution as a constructive sale, where FMV 200000- its tax basis 100000= 100000 XYZ's profit & added to current E&P.

However, also ,the distribution of the property reduces E&P by the fair market value of the property,ie. 100000-200000= -100000

XYZ' s E&P= Current E&P 100000+Profit on dtstribution 100000-200000 (FMV)=0

Second, the corporation distributes land with a FMV of $100,000 and a tax basis to the corporation of $200,000.

Here, even though FMV is less than XYZ's tax basis in the property

It cannot claim a loss

but ,it must decrease current E&P 100000 by the adjusted basis of the property 100000

XYZ' s E&P= Current E&P 100000+Adjusted basis of dtstribution 100000 (FMV)=0

For the shareholder,receiving the property, the property's FMV is the adjusted basis in the property & not XYZ's basis.