Nash is one of three equal unrelated shareholders of MacLeod Corporation. Nash h

Question

Nash is one of three equal unrelated shareholders of MacLeod Corporation. Nash has held MacLeod stock for four years and has a basis in his stock of $50,000. MacLeod has $300,000 of current and accumulated E&P and distributes $100,000 to Nash.

a. What are the tax consequences to MacLeod and to Nash if Nash is an individual and

the distribution is treated as a dividend?

b. In Part a, what would be the tax consequences if Nash were a corporation?

c. What are the tax consequences to MacLeod and to Nash (an individual) if Nash surrenders all his stock in a redemption qualifying for sale treatment?

d. In Part c, what would be the tax consequences if Nash were a corporation?

e. Which treatment would Nash prefer if Nash were an individual? Which treatment would Nash Corporation prefer? Why?

Explanation / Answer

a. As one of the shareholders Nash, Recognizes a Dividend Income of $100,00 focus to the 15% tax rate MacLeod or regulator of the firm reduces it's E&P by $100,000 the value of the Divend Income.

b. As per part (a) Nash has a dividend income of $100,000 which is treated as ordinary income nonetheless Nash is allowed to an 80% dividend income received deduction (under tax consequences). MacLeod decreases its E&P by $100,000 the value of the dividend Income.

c. Nash is one of the shareholders. Nash as an individual shareholder recognizes a long term capital gain of $50,000 it can be computed ($100,000-$50,000 Basis) MacLeod decreases its E&P by $100,000 ($100,000 is a third of the $300,000 Balance) Because Nash surrendered or sold is part of the outstanding shares in a deliverance qualifying as a sale.

d.The outcome would be the same as part (c), Nash recognizes a $50,000 long term capital gain and checker decreases its E&P by $100,000.

e. If Nash as an individual shareholder he must prefer long term capital gain treatment. Even though capital gains and dividend incomes can be taxed a maximum rate of 15% as per tax consequences Nash deducts his part in his stock in computing his $50,000 fo capital gain, while dividend Revenues treatment will not permit the deduction of basis so he could have to report $100,000 of dividend incomes in addition Nash may be treated to offset some or all of his capital gains from capital losses.

If Nash is considered as corporation, it usually could prefer dividend income treatment is better.

A dividend income would add to Nash's taxable income by $20,000.

Nevertheless if the Corp realized a $50,000 capital loss can be deducted or offset from when ever capital gain occurs in those cases Nash corp might prefer the capital gain

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