L0.1, 2, 6 Teal Corporation, with E & P of $2 million, distributes property with
ID: 2602362 • Letter: L
Question
L0.1, 2, 6 Teal Corporation, with E & P of $2 million, distributes property with a basis of $150,000 and a fair market value of $400,000 to Grace. She 15% of the outstanding Tea shares. What are the tax consequences to Teal Corporation and to Grace if the distribu- tion is a property dividend? What are the tax consequences in (a) if Grace is a corporation? What are the tax consequences to Teal Corporation and to Grace if the distribu- tion is a qualifying stock redemption? Assume that Grace's basis in the redeemed shares is $90,000. owns a. b. c. d. What are the tax consequences in (c) if Grace is a corporation? e. If the parties involved could choose from among the preceding options, which would they choose? Why?Explanation / Answer
a. What are the tax consequences to Teal Corporation and to Grace if the distribution is a property dividend?
Teal Corporation would earn a taxable gain that equalsof $120,000 on the property distribution computed as [=$200,000 (fair market value) - $80,000 (basis in property)]. The gain would be categorised as ordinary or capital thus the conditions which depends on the type of property distributed. The E & P of Teal Corporation would be raised by the amount of $120,000 (the amount of gain to Teal) and reduced by $200,000 which is the FMV of the property distributed). Also Teal’s E & P would be reduced by the amount of tax due on the gain recognized. Grace would earn an income as dividend on $200,000 and a basis in the property of $200,000
b. What are the tax consequences in (a) if Grace is a corporation?
Teal Corporation tax consequences would remain the same as in option I. Grace Corporation would earn a dividend income of $200,000, however only 30% of the $200,000, that equals $60,000, would be taxed to Grace. Since Grace Corporation owns less than 20% ownership interest in Teal Corporation, thus 70% dividends received deduction is allowed. Grace Corporation would have be categorised as a basis of $200,000 in the property
c. What are the tax consequences to Teal Corporation and to Grace if the distribution is a qualifying stock redemption? Assume that Grace’s basis in the redeemed shares is $90,000.
The tax consequences to Teal Corporation would be the same as improved in option I . Grace would earn a capital gain that equals $140,000 [=$200,000 (value of the property) - $60,000 (basis in stock)] and the allowed basis of $200,000 in the property received
d. What are the tax consequences in (c) if Grace is a corporation?
Teal Corporation tax consequences would remain the same as in option I. Grace Corporation would earn a capital gain that equal $140,000 [=$200,000 (value of the property) - $60,000 (basis in stock)] and allowed basis of $200,000 in the amount of property received.
e. If the parties involved could choose from among the preceding options, which would they choose? Why
If we make an assumption that Grace is an individual, then would select the qualifying stock redemption (i.e. option c.). Now if the distribution is a qualifying stock redemption, then the amount of capital gain equals $140,000. If the distribution is categorised as dividend, as in option I, then would earn a dividend income of $200,000. The basis in the property received will remain the same whether the transaction is a qualifying stock redemption or a dividend. If Grace is a corporation, then the preference will br that the distribution be a dividend as only 30% of the dividend would be taxed (i.e. option II.). Teal Corporation itself would have no preference as the consequences of the tax from the transaction are remains similar under each option
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