eBook Calculator Problem 6-50 (LO. 1, 2) Broadbill Corporation (E&P; of $650,000
ID: 2539106 • Letter: E
Question
eBook Calculator Problem 6-50 (LO. 1, 2) Broadbill Corporation (E&P; of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following ndividuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Broadbill stock four years ago. In the current year, Broadbill Corporation distributes $75,000 to Tammy in redemption of 150 of her shares. Determine the tax consequences of the redemption to Tammy and to Broadbill under the following independent circumstances a. If Tammy and Jeremy are grandmother and grandson: The transaction does not qualify for sale or exchange treatment. Tammy will recognize dividend income of 75,000. Broadbill Corporation's E & P is reduced by n , the amount of the dividend distribution. b. If the three shareholders are siblings: The transaction doesqualify for sale or exchange treatment. Tammy will recognize a long-term capital gain of 67,500 . Broadbill Corporation's E & P is reduced by SC as a result of the distribution. eedback Check My Work Partially correctExplanation / Answer
Part a)
The transaction does not qualify for sale or exchange treatment. Tammy will recognize dividend income of $75,000. Broadbill Corporation’s E & P is reduced by $75,000, the amount of the dividend distribution.
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Explanation:
In the given case, Tammy continues to hold 52.9% [(300 - 150 + 300)/(300 - 150 + 400 + 300)*100] of ownership interest in the corporation after redemption. Therefore, the provisions of qualifying stock redemptions are not met and the amount of $75,000 received by Tammy will be recognized as dividend income. As per the applicable rules, if stock redemption takes the form of a dividend payment (as in this case), the company can reduce the entire amount of (dividend distribution) from its E & P. Consequently, Broadbill Corporation’s E & P is reduced by $75,000, the amount of the dividend distribution.
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Part b)
The transaction does qualify for sale or exchange treatment. Tammy will recognize long term capital gain of $67,500. Broadbill Corporation’s E & P is reduced by $75,000, as a result of the distribution.
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Explanation:
As the stock is owned by siblings, there will be no attribution as per the rules of Section 318. As a result of redemption, Tammy's ownership interest will be 17.6% [(300 - 150)/(300 - 150 + 400 + 300)] which satisfies the 50% test. Further, the ownership interest of 17.6% post redemption also satisfies the 80% test [17.6% is less than 80%*300/1,000 (pre-redemption ownership)]. Therefore, this redemption will be treated as substantially disproportionate and will qualify for sale or exchange treatement. Because of this, Tammy will recognize long term gain equal to $67,500 [75,000 - 7,500 (basis)]. Broadbill Corporation’s E & P will be reduced by $75,000, as this amount is less than the maximum allowed limit of $97,500 [150/1,000*650,000].
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