Kathryn, an individual, own all of the outstanding stock in Copper Corporation.
ID: 2345027 • Letter: K
Question
Kathryn, an individual, own all of the outstanding stock in Copper Corporation. Kathryn purchasedher stock in Copper 11 years ago, and her basis is $18,000. At the beginning of this year, the
corporation has $38,000 of accumulated E &P and no current E&P (before considering
the effect of the distributions. What are the tax consequences to Kathryn
(amount and type of income and basis in property received) and Copper Corporation (gain or loss and effect on E&P)in each of the following situations?
c. Assume that the land distributed in (a) is subject to a $23,000 mortgage (which Kathryn
assumes). How would your answer change?
d. Assume that the land has a fair market value of $28,000 and an adjusted basis of
$31,000 on the date of the distribution. How would your answer to (a) change?
NEED HELP!
Explanation / Answer
c) Copper recognizes $7,000 of gain and increases E & P by $7,000, as a result of the distributionf appreciated land. The amount deemed distributed is the fair market value of the land, net of the mortgage, or $5,000 ($28,000 fair market value – $23,000 mortgage). Since there is $7,000 of current E & P and $38,000 of accumulated E & P, the entire $5,000 distribution is taxed as a dividend. Current E & P is reduced by the $5,000 distribution, leaving accumulated E & P with a beginning balance for the following year of $40,000 ($38,000 accumulated E & P + $7,000 current E & P – $5,000 distribution). Kathryn’s basis in the land is its fair market value ($28,000). d) While Copper realizes a $3,000 loss, none of the loss is recognized on the distribution. Kathryn receives a $28,000 dividend and she takes a basis of $28,000 in the land. Copper has accumulated E & P at the beginning of the following year of $7,000 [$38,000 accumulated E & P – $31,000 (greater of $31,000 adjusted basis of the land or $28,000 fair market value)].
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