Petoskey Stone Quarry Inc. (PSQ), a calendar-year, accrual-method C corporation,

Question

Petoskey Stone Quarry Inc. (PSQ), a calendar-year, accrual-method C corporation, provides landscaping supplies to local builders in northern Michigan. PSQ has always been a family-owned business and has a single class of voting common stock outstanding. The 500 outstanding shares are owned as follows Number of shares Nick Adams Amy Adams (Nick's sister) Abigail Adams (Nick's daughter) Charlie Adams (Nick's son) Sandler Adams (Nick's father) Total shares 150 50 50 100 500 Nick Adams serves as president of PSQ, and his father Sandler serves as chairman of the board. Amy is the company's CFO, and Abigail and Charlie work as employees of the company. Sandler would like to retire and sell his shares back to the company. The fair market value of the shares is $410,000. Sandler's tax basis is $6,000 The redemption is tentatively scheduled to take place on December 31 of this year. At the beginning of the year, PSQ had accumulated earnings and profits of $2,100,000. The company projects current E&P; of $165,000. The company intends to pay pro rata cash dividends of $260 per share to its shareholders on December 1 of this year. Required: a. Assume the redemption takes place as planned on December 31 and no elections are made by the shareholders 1. What amount of dividend or capital gain will Sandler recognize as a result of the stock redemption? 2. How will the tax basis of Sandler's stock be allocated to the remaining shareholders? b. If Sandler files a proper election to waive the family attribution rules, what is the amount of his gain? c. Compute PSQ's accumulated earnings and profits on January 1 of next year, assuming the redemption is treated as an exchange Complete this question by entering your answers in the tabs below Req A2 Req A1 Assume the redemption takes place as planned on December 31 and no elections are made by the shareholders 1. What amount of dividend or capital gain will Sandler recognize as a result of the stock redemption? Req B

Explanation / Answer

The stock redemption is a sale because total interest of Sandler will waive. So The proportionate amount of E&P will be reduced ie one fifth (100/500 shares)

2,100,000 + 165000 = 2265000*1/5 = $ 453000 will be reduced from E&P.

For Sandler capital gains = 410000 Less (420000 ie 1/5 of Retained earnings add 6000 tax basis)= 410000- 426000= 16000 capital loss

Dividend Income for Sandler is $260*100 shares = 26000

The family attribution rule be waived if • Sandler has no position in company other than creditor • He will not acquire any interest in company in upcoming 10 yrs from redemption and if he intimate IRS about this.

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