7-48 Part 1 - Spin off: effect on shareholder . in 2003 RIC corp was formed by B

Question

7-48 Part 1 - Spin off: effect on shareholder. in 2003 RIC corp was formed by B,C,D and E. Each contributed $25,000 for 100 shares of the corporation's stock. The corporaion was established to cpitalize on the public's increased need for leisure activities. RIC's first transation in 2003 was to purchase a bowling alley. in anticipation of the exercise craze in the nineties, the corporation purchased all the stock of X corporation in 2006. X operated a chained of health salons, now aerobix centers. In 2011, RIC purchased all of the stock of Y corporation, which had manufactured a line of health food since 1986.

a. RIC's management currently believes that it has grown too fast and consequently should divest itself of X or Y. Will a spin off of either subsidiary be nontaxable? On December 1, 2014 RIC distributed all its X stock pro rata in a transaction that satisfies the requirements of sec 355. Immediately after the distribution the RIC stock and X stock were valued at $240,000 and $40,000, respectiely. In addition, RIC distributed X securities pro rata worth $20,000 (FV $22,000). B received X stock valued at $10,000 and securitie worth 5,000. RIC has $90,000 of E&P. X net worth is $50,000.

b.State the amount of realised gain or losses, if either is recognized by B, and is character.

c. What is B's basis in his RIC stock and his stock and securities of X?

PArt 2- Split off: Effects on shareholder. Same facts as in the above problem except B surrenders all his stock in RIC for all of the X stock and securities.

a. state the amount if gain or loss, if either is recognized by B, and it character.

b. what is B's basis in his stock and securities of X?

Explanation / Answer

Part 1)

a)Yes a spin off of either subsidiary will be nontaxable.There are no exchange of funds(income) to be taxed during spin off, there is only a distribution of shares of the subsidiary on a pro rata basis to the shareholders of the parent.

b) Total market value of holding after distbn=10,000+(240,000/4)=70,000

INtital value of holdings=25,000

amount of realised gain or losses by B=70,000-25,000=45000

c) B's basis in his RIC stock=(60,000/70,000)*25,000=$ 21428.57

B's basis in his X=(10,000/70,000)*25,000=$ 3571.43

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.