New Orieans, Louisiana attracts a lot of tourists. Any place that attracts a lot

Question

New Orieans, Louisiana attracts a lot of tourists. Any place that attracts a lot of tourists need to have places for the tourists to eat and drink. By saying "during," the beverages do not necessarily have to be alcoholic, but along the Bourbon Street area, there are places that are similar to beach resorts where stores sell ice cream over the counter to people who walk up to buy ice cream, except that on Bourbon Street, there are places that sell alcoholic beverages over the counter. Not every restaurant sells alcoholic beverages, and for some that do, the food is the main thing, not the drinks. There are many restaurants which have been in business a long time, and others which are new. Cafe du Monde is open 24 hours a day except for Christmas Day hurricanes. It has been in the same place in the French Market since 1862. The menu is simple, coffee, milk, orange juice, beignets. Assume that the restaurant is owned as a C corporation, and had accumulated earnings and profits amounting to $2,410,000 as of December 31. 2014. Also assume that during 2015, it earned a pre-tax profit of $1,032,000 up through the end of November. On December 1, 2015, there was a two-for-one stock split, so that instead of there being 1,000 shares outstanding valued by an appraiser at $2,300 per share, after the stock split there were 2,000 shares outstanding valued at $1,150 per share. Every stockholder before the split now owns two shares for every one share he owned before the split. The corporation also paid a cash dividend that same month of fifteen dollars per share to each of the post-split shares. This is the only dividend paid during the corporation's fiscal year ended December 31, 2015. Suppose Lily, one of your clients, owned ten shares in the corporation before the split, with a per-share basis of $180.00 per share. After the split, she owns twenty shares. How much gain does Lily realize from the split? How much gain does Lily recognize from the split? What is the total of the taxable dividends Lily received during December? For the stock split, how much can the corporation deduct? Assuming that the corporation somehow exactly breaks even for meaning that it has zero profit or loss for the month. If it paid out a total of $180,000 in the December 1, 2015 dividend, what will be the accumulated earnings and profits at December 31.2015?

Explanation / Answer

Lily realised nothing from split because the net wealth of Lily would remain same before and after the split i.e. (20 x 1150) = $23000 or (10 x 2300) = $23000 Lily can recognise (23000 - 1800) = $21200 but its not because of split. Taxable Dividends of Lily = (15 x 20) = $300 Corporation cannot deduct anything for stock split because it is not an expense it is a kind of restructuring. Corporation cannot deduct anything for dividends because it is a C corporation Retained Earnings at December 31, 2015 = 2410000 + 1032000 - 180000 = $3262000

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