C:4‑29 Current E&P Computation. Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available:
For the current year, Water reports and $80,000 long-term capital loss and no capital gains.
Taxable income includes $80,000 of dividends from a 10%-owned domestic corporation.
Water paid fines and penalties of $6,000 that were not deducted in computing taxable income.
In computing this year’s taxable income, Water deducted a $20,000 NOL carryover from a prior tax year.
Water claimed a $10,000 U.S. production activities deduction.
Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.
Assume a 34% …show more content…
The distribution is treated as a dividend to the extent of the distributing corporation’s current and accumulated E&P. Any distribution amount exceeding E&P is treated as a return of capital that reduces the shareholder’s stock basis (but not below zero). Any additional excess is treated as a capital gain. The shareholder’s basis in the property received is its FMV. The shareholder’s holding period for the property begins on the day after the distribution date.
What are the tax consequences to Checker and to Bailey (an individual) if Bailey surrenders all her stock in a redemption qualifying for sale treatment?
Sale Exception: If the redemption meets specific requirements, the distribution amount received by the shareholder is offset by the adjusted basis of the shares surrendered. The difference generally is treated as a capital gain or loss. No basis adjustment occurs.
Gain/Loss Recognition: Under the sale exception, the corporation recognizes gain (but not loss) as though it has sold distributed noncash property for its FMV immediately before redemption.
Earnings and Profits Adjustment: For a redemption treated as a sale, E&P is reduced by the portion of current and accumulated attributable to the redeemed stock. Any distribution amount exceeding this portion reduces the corporation’s paid-in capital.
In Part c, what would be the tax consequences if Bailey were a corporation?
Sale