C and D organized Z corporation 10 years ago, each contributing $40,000 and each
ID: 2449276 • Letter: C
Question
C and D organized Z corporation 10 years ago, each contributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one for one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1600 per share. In that year, five years ago, Z had accumulated E&P of $52,000 and current E&P of $12,000. In the current year, Z has accumulated E&P of $112,000 and current E&P of $8000.In December of the current year, shortly after receiving the preferred stock, C contributed to a charity and the charity shortly thereafter sells it to Z corporation for $36,000.
a. C has a charitable contribution of $36,000.
b. C’s charitable contribution is reduced by the ordinary income component of $32,000 resulting in a charitable contribution of $4,000.
c. The IRS might argue that there is no charitable contribution but rather a straight sale to the corporation Z by C resulting in $36,000 of ordinary income.
d. B and C.
e. None of the above.
Please explain why you choose this answer. Thank you.
Explanation / Answer
we should choose option B and C as answer The value of shares as per E&P on five year ago when it declared a one for one dividend payable was 180 per share that is (80000+52000+12000)/(800 no of shares) and it has alloted so 80 rs over rs 100 face value multiplied by 400 shares is the gain which was received by C. However when it transferred it to charity and charity sold it 36000 than we can assume 4000 as charitable contribution and 32000 as ordinary income however The transaction might meet the requirements for an exception under Section 306(b)(4)(B). The question is of the tax avoidance purpose for the sale. The transaction might meet the requirements for an exception under Section 306(b)(4)(B). The question is of the tax avoidance purpose for the sale. Under Section 170(e)(1)(A), the amount of the charitable deduction is to be reduced by the element of ordinary income in the donated property upon a sale.The point is that Section 306 can create traps in a variety of contexts.
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