Question

In: Accounting

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation....

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corporation in a transaction that qualifies for non recognition under Code Section 351. Mario transferred Property A, which had a tax basis of $150,000 and a fair market value of $80,000 at the time it was transferred. During the time Crafty held Property A, its fair market value declined to $40,000. On May 20, 2017 Crafty Corporation adopted a plan of liquidation. Two days later, as part of this plan, Property A was distributed to Ronald.
a. Explain the tax consequences of this distribution for the corporation.
b. Suppose that Ronald purchases 75 of Jane’s shares in 2016. What would be the tax consequences of the distribution?

Solutions

Expert Solution

ANS :- a

Normally transferor of a capital asset is liable to pay capital gain tax because he receives
consideration on transfer of capital asset by way of sale, exchange etc. If the consideration is more
than the cost of acquisition and cost of improvement of asset and expenses incurred in connection
with the transfer, then such excess is included as capital gains, in the gross total income of the
transferor.

Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.

hence whatever the assets transfer by corporation to its share holder on liquidation would not be attaracted for any tax consequences (capital gain)

Ans :- B

Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend with in the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48.

Computation :
Money received + Market value of the asset – Deemed dividend u/s 2(22)(c) = Sale Consideration of the shares in the liquidating company

In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation should be excluded.

Since the dividend is exempt in the hands of shareholders the company is liable to pay dividend distribution tax @ 15% + 10% surcharge + 2% education cess u/s 115O.

as now calculation of ronald tax on distribution.

ronald purchase 75 of jane's share in 2016 hence at the time of distribution ronald hold the total 175 share out of 300 share hence taxblity would be charge on such 175 share which hold 58.33 % right.

i.e 40000*58.33% =23332 (tax on this amount .)

Where the asset other than cash acquired by the shareholder on the liquidation of the company is subsequently transferred, in this case cost of acquisition of the assets shall be the fair market value of the asset on the date of distribution . No other adjustment like deemed dividend shall be made.


Related Solutions

You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma...
You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma plans to pay $2,200 dividend at the end of the current year (i.e. one year from today) and a liquidating dividend of $4,840 at the end of 2 years from today. The required return on Gamma’s stock is 10 percent. Ignoring taxes, and transaction costs. a. What is the value of your shares of stock? Show calculations to support your answer. b. Suppose shareholders...
You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma...
You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma plans to pay $2,200 dividend at the end of the current year (i.e. one year from today) and a liquidating dividend of $4,840 at the end of 2 years from today. The required return on Gamma’s stock is 10 percent. Ignoring taxes, and transaction costs. a. What is the value of your shares of stock? Show calculations to support your answer. b. Suppose shareholders...
You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma...
You own 100 shares of stock of unlevered Gamma Company which has 1000 shares outstanding. Gamma plans to pay $2,200 dividend at the end of the current year (i.e. one year from today) and a liquidating dividend of $4,840 at the end of 2 years from today. The required return on Gamma’s stock is 10 percent. Ignoring taxes, and transaction costs. a. What is the value of your shares of stock? Show calculations to support your answer. b. Suppose shareholders...
Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $6,000 and was subject to a 21 percent tax rate.
Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $6,000 and was subject to a 21 percent tax rate. In addition, Flower received $20,000 of life insurance proceeds due to the death of an employee (Flower paid $500 in life insurance premiums this year). Flower had $5,000 of accumulated E&P at the beginning of the year. (Leave no answer blank. Enter zero if applicable.) b. Flower distributed $6,000...
Over a 4 year period the Yellow corporation purchased 100% of the outstanding voting shares of...
Over a 4 year period the Yellow corporation purchased 100% of the outstanding voting shares of Green Co. The acquisition was made in a series of steps as follows... Date % Purchase Price January, Year 1 5% 5,000 January, Year 2 10% 12,000 January, Year 3   10% 15,000 January, Year 4 75% 200,000 Total 100% 232,000 Any excess of the purchase price over the net book value of the assets was attributed to goodwill. The acquisition in Year 3 allowed...
WRT, a calendar year S corporation, has 100 shares of outstanding stock. At the beginning of...
WRT, a calendar year S corporation, has 100 shares of outstanding stock. At the beginning of the year, Mr. Wallace owned all 100 shares. On September 30, he gave 25 shares to his brother and 40 shares to his daughter. WRT’s ordinary income for the year was $216,000. What portion of this income must each shareholder include in income? Assume 365 days in a year. (Round income per day of ownership to 4 decimal places. Round your final answers to...
Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares...
Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?
1) XYZ Corporation has outstanding 1,000 shares of $100 par, 10% preferred stock, and 6,000 shares...
1) XYZ Corporation has outstanding 1,000 shares of $100 par, 10% preferred stock, and 6,000 shares of no-par common stock. Stangeland Corp.'s balance sheets show these issues as follows: pfd: $100K common: $120K Stangeland Corporation paid out dividends for the last four years as follows: year A, $9,000 b 10,000 C 17,000 D 33000. if the preferred stock is cumulative and fully participating, the allocation of the year D dividends between preferred and common stock was select one A) $...
Raymond Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5% $100...
Raymond Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5% $100 par value preferred stock outstanding, and 151,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $93 per share, and the bonds have 15 years to maturity and sell for 118% of par. The market risk premium is 7.7%, T-bills are yielding 4%, and...
Raymond Mining Corporation has 8.5 million shares of common stock outstanding, 290,000 shares of 4% $100...
Raymond Mining Corporation has 8.5 million shares of common stock outstanding, 290,000 shares of 4% $100 par value preferred stock outstanding, and 143,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $33 per share and has a beta of 1.25, the preferred stock currently sells for $95 per share, and the bonds have 10 years to maturity and sell for 114% of par. The market risk premium is 7.3%, T-bills are yielding 6%, and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT