On March 1, Cream Corporation transfers all of its assets to Coffee Corporation

Question

On March 1, Cream Corporation transfers all of its assets to Coffee Corporation in exchange for 10% of its common voting stock. At the time of the reorganization, Cream has assets valued at $4 million (basis of $3 million) and its earnings and profits account shows a deficit of $650,000. Coffee’s earnings and profits as of March 1 were $420,000. Due to the reorganization, Coffee has an NOL for the current year of $150,000. Coffee still declares its usual dividends of $100,000, paid on April 30, August 31, and December 31 ($300,000 of total dividends).

a. How are the Coffee shareholders taxed on the distribution?

b. What portion of the current-year NOL may be carried back to prior Coffee and/or Cream tax years?

Explanation / Answer

a $270000 of dividend(420000-150000) are taxed to the shareholders as dividends and $30000 is a return of capital. b The $150000 NOL for the current year can be carried back in full to offset the Coffee Corporation prior year's taxable income. It cannot be used to offset any prior year taxable income of Cream Corporation

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