12. Ivory Corporation (E & P of S1 million) has 2,000 shares of common stock out
ID: 2540187 • 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
Ivory Corporation a.What are the tax results to Veronica on the redemption of her Ivory stock? Veronica has a long-term capital gain of $337,500 [$390,000 (amount realized) – $52,500 (stock basis)]. The distribution qualifies as a disproportionate redemption under § 302(b)(2). Veronica has a 50% (1,000 shares ¸ 2,000 shares) ownership interest in Ivory Corporation before the redemption and a 39.4% (650 shares ¸ 1,650 postredemption shares) ownership interest after the redemption. Both the 50% and the 80% [i.e., 39.4% < 40% (80% ´ 50%)] tests are met. Veronica will have a basis of $390,000 in the land. b.What are the tax results to Ivory Corporation on the distribution of the land? Ivory Corporation has a recognized capital gain of $210,000 [$390,000 (fair market value) – $180,000 (adjusted basis)] on the distribution of the land. Gains (but not losses) are recognized in nonliquidating distributions. In a qualifying stock redemption, E & P is reduced by no more than the ratable share of the E & P attributable to the stock redeemed; thus, Ivory reduces its E & P by $175,000 [$1 million E & P ´ 17.5% (percentage of stock redeemed)].Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.