General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, In
ID: 2368075 • Letter: G
Question
General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P; of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize as a result of the transaction? Tiara does not recognize any dividend income or capital gain. Tiara recognizes capital gain of $50,000. Tiara recognizes dividend income of $50,000. Tiara recognizes capital gain of $25,000.Explanation / Answer
A. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share. B. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share. C. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share. D. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.
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