Kathryn, an individual, own all of the outstanding stock in Copper Corporation.
ID: 2345029 • 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?
a. Copper distributions land to Kathryn. The land was held as an investment
and haas a fair market value of $28,000 and an adjusted basis of $21,000>
b. Assume that Copper Corporation has no current or accumulated E&P prior to the
distribution. How would you answer to (a) change?
NEED HELP!
Explanation / Answer
a) Copper recognizes a gain on the distribution of the land to Kathryn. The amount of the gain is $7,000 ($28,000 fair market value – $21,000 adjusted basis). Since Copper’s gain increases its E & P, it will have $7,000 of current E & P and $38,000 of accumulated E & P available to apply to the distribution. The entire value of the land ($28,000) is a dividend to Kathryn, leaving $17,000 of accumulated E & P ($45,000 total E & P at year end – $28,000 distribution) as the beginning balance for next year. Kathryn’s basis in the land is its fair market value ($28,000). b) The distribution triggers $7,000 of gain to Copper and creates $7,000 of current E&P. Consequently, the distribution generates a $7,000 dividend to Kathryn (to the extent of current E & P). The remaining $21,000 of the value of the land decreases Kathryn’s stock basis from $18,000 to zero and is a tax-free recovery of capital. The remaining $3,000 is taxed as capital gain (assuming Kathryn’s stock is a capital asset). Kathryn’s basis in the land is $28,000.
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