A corporation distributes property with a fair market value of $50,000, an adjus

Question

A corporation distributes property with a fair market value of $50,000, an adjusted basis of $20,000 for taxable income purposes and an adjusted basis of $15,000 for earnings and profit (E&P) purposes to one of its shareholders in a non-liquidating distribution. The property is encumbered by a $60,000 mortgage which the shareholders assumes. The corporation pays tax at a 34% marginal tax rate. What is the effect of the income tax paid on any gain on the corporation’s E&P?
>Increase of $35,000
>Decrease of $13,600
>Increase of $10,000
>Decrease of $10,200

A corporation provides the shareholder the right to purchase one additional share of its stock for $40 for each of the shares that the shareholder currently owns. The shareholder currently owns 1000 shares. The fair market value of the stock is $50 per share. The shareholder’s adjusted basis in his 1000 original shares is $8000. What is the shareholder’s basis in the stock rights that should be used to calculate gain or loss if the rights were to be sold?
>$10, 000
>$1333
>$1667
>$50,0000

A corporation that has current earnings and profits of $150,000 distributes 75 shares of preferred stock with a fair market value of $125,000 to its sole shareholder in a nontaxable stock dividend. Prior to the distribution, the shareholder owned 250 shares of common stock with an adjusted basis of $100,000 and a fair market of $750,000. The shareholder subsequently sells the preferred stock to an unrelated party for $5000 per share. How much capital gain must the shareholder recognize as a result of the sale of the preferred stock shares?
>$125,000
>$375,000
>$360,714
>$235,714

Explanation / Answer

1

Decrease of $10,200 as for tax purposes value will be taken on tax basis.

2

If rights are sold price for benefit will be computed as 50-40*number of shares will be taken.

3

We will use equity price for profit's as no nearest price is given.

Particulars Amount Particulars Amount Share price 400 Earning potential 150000 Fair market 3000 75% prefernce stock 125000 Value difference 2600 Remaining Earnings left 25000 Preferred stock price 5000 Difference in valuation/(value difference*Preffered stock price) 1250000 Profit 375000

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