12. Ivory Corporation (E & P of S1 million) has 2,000 shares of common stock out
ID: 2540186 • Letter: 1
Question
12. Ivory Corporation (E & P of S1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Veronica and Tommie each paid S150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment (basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares. a. What are the tax results to Veronica on the redemption of her Ivory stock? b. What are the tax results to Ivory Corporation on the distribution of the land?Explanation / Answer
12) a) Veronica has a long term capital gain of $337,500 [$390,000 (Amount Realized) - $52,500 (350 shares*$150 per share = $52,500 stock basis)]. The distribution qualifies as a disproportionate redemption under § 302(b)(2). Veronica has a 50% (1,000 shares out of total 2,000 shares) ownership interest in Ivory Corporation before the redemption and a 39.4% (650 shares out of 1,650 shares) ownership interest after the redemption. Both the 50% and the 80% [i.e. 39.4% < 40% (80%*50%)] tests are met. Therefore Veronica will have a basis of $390,000 in the land.
b) Ivory corporation has a recognized capital gain $210,000 [$390,000 (fair market value) - $180,000 (adjusted basis)] on the distribution of the land. Gains (but not losses) are recognized in non liquidating distributions. In a qualifying stock redemption, E & P is reduced by not more than the ratable share of the E & P attributable to the stock redeemed. Thus, Ivory reduces its E&P by $175,000 [i.e. $1 million E & P*17.5% (350 shares/2,000 shares = 17.5% percentage of stock redeemed)].
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