Example 18-1 Ging has a tax basis. in his Spartan Cycles and Repair (SCR) stock of $24,000. GinnyS.tax basis in her SCR stock is $10,000. Assume SCR has current earnings and profits (CE&P) of $30,000, and go accumulated earnings and profits. At year-end, SCR makes a $48.000 distribution to 25 percent Whats the tax treatment of the distribution to Jim and Ginny? What is Jim and Ginny's tax basis in their SOR Pu, stock after the distribution? Usbihnbonis on LIF 0 iter ¥ ~~ tin Alleate C&P? based on auverhip fy 2 J Loh ~ © lune: EXP = Z0,000°1SZ basis N= 46,000 = 22800. 2 X2,500 (Dy). © Au EvP= ®. Sant hove. de @ Pasig = 24,00 O . 24,000 Rhum of a lap fel Warterade) Tax Yasis 44,000 - 22600 - 24,000 = 24,000 2 4,000 = (500 Cop Guin R. (L4FO) Ginny Dstihudkon = [000 2) Camo XP = 2o002K Joo =. Ts00 (Av ) © Ae EP = & Oo ®& ; O faas = [0,000 D 16,000 -]£00 =6500 ‘hak Hae Py zr “Tax Basis. = (o.000- B00 =(S00 > Relturn of Capel Romtcote)Example Oakland Corporation reported a net operating loss of $500,000 in 2013 and elected to carry the loss forward to 2014. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for 2013 would be? No wectler -the cempacy Casrieg forroucl AOL. anno, Use wol les sfrfrrug os eae pint ly ceodaudectes IL (Loss (S00, coo) E&P Acldl = Tog “€xkingt Meme, (mateipol bend / fey omployee. life surance. ) al + 10,c072 4old “Toxe clefereed gem Cashallutnd cle) aa 280,000 Sublets = Tax drsodleneel, okeduchos (sez ME, polio, suas Lerbilustron , free | ) qi _ ‘20.CO Cunevd (260,000) 2Example 18-4/5 On December 31, SCR distributed $48,000 to Jim and $16,000 to Ginny. Jim has a tax basis in his SCR stock of $24,000. Ginny's tax basis in her SCR stock is $10,000. Jim has 75% ownership and Ginny has 25% ownership. Calculate dividend income and tax basis for each shareholder when 1) When SCR reported current E&P of $40,000. The balance in accumulated E&P at the beginning of the year was $16,000; 2) When SCR reported current E&P of $60,000, The balance in accumulated E&P at the ~ beginning of the year was negative $20,000; @ hon C : 1 ey _ Tin (4600/7152 ) Gunuf UhoobxZ, ‘) cmt EXP (4ecve) — 4qwox If ~Py cent tv) 4amm22=(oecctt) 4c EXP Clboee) Ihe AZ = beootIw) theo? SZ=4evelty) Rtn of Capital. thovo—3oa0 -/2,000=4,000 Mho00 loss Yee? (Roc ). lesevlbyeo0, or basis =24000) lesser Crew, o bees) 2 = bo o fee a = Zo00 “Taw Besrs 24 ye70 - 00 =berwo- lowwo -2wv0= heod oy 20000412000 =42,00e 000-4 pewo=/4hoo0. @ When Corer ERP 70 & Ac ExPe Oo Cam EXP b0,000K Th = 4S000Py) bu ecex2 B= KGrootiv) Au EP Neyotre E&P Is web rachroleel Roc 4hovo - 45000 -3,000 Ib, - [S,e0= [eco besser yoo, ov 24o0)22 coo bsser foe, fo,ax)= ovo Tow Basis. § 2hewo-Fovo=2howe —eew0- [ow ShoveExample 18-6/7 ds : 2 b-month Gime af ishihuen) On June 30. SCR distributed $48,000 to Jim and $16,000 to Ginny. Jim has a tax basis in his SCR stock of $24,000. Ginny's tax basis in her SCR stock is $10,000. Jim has 75% ownership and Ginny has 25% ownership. Calculate dividend income and tax basis for each shareholder when 1) SCR reported current E&P of negative $20,000. The balance in accumulated E&P at the beginning of the year was $60.00. 2) SCR reported current E&P of negative $50,000. The balance in accumulated E&P at the beginning of the year was negative $60,000. WD Canent PEO & he EXP >O « step! > Calaudile new E&P basa] on pontee] nepéne. EAP. Poredted regen C&P. ope x—E Meth — (Io.cov) 12 (meoutl ). + ce EKxP. b few KP SO.000 | step2>. bin (4oov/15Z ) in Uhevo/asZs ) Mew Ek i? S000 XTSZ =31,S00My) Sowoo 256 [2,500 Th) Roc. Boo -2 1, 00= fe,S00 (bevo—l2,00=2,000 lesen (le,S00, 24c00)= S00 bserl2S00, kyeve) =2560. Tax Boss. 2derro—(oS00 =/3,500 lacwo-3F00 = 6600. BE). phon Cunews ELP 4 5: Assume Bil Hotdog Has current and Eeomiaed E&P of 400,000 at Dacember 1, 2013, On Debember 31, the company made a distribution of office’ building to its sole shareholder, Bill. Calculate the tax Consequences fot Bill_—> 7 “Hotdog>(gain recognized and E&P) E> apart “The office building's fair market value was $150,000 and its tax and E&P basis was $100,000. 1a) Bill assumed a liability of $25,000 attached to the office building; 1b) What if Bill assumed the liability of 200,000; The office building's fair market value was $50,000 and its tax and E&P basis was $100,000. Bill assumed a liability of $25,000 attached to the office building; 142. bedilily = 28000 < EMMY = (Caco : —> Gun secoypined = FM — foe hacrs = [Lac -lnepo> So000 ae pepeny approves CFV = (Sacco >t basis= [ecove) PAERP = — FIV of Peoperdy + Lrahilety eeSrned ley Aaccholdeys fare yee sisteeresia of oetrence S&P = -(Sacv0 425000 = - [25 00 1G (ehowe } 2 1b > Lralalieg = 20000 > FMV = [Coed —> Gaon receyuned = Li fait — tux hasrs =2eer0 —leove® K the Property opprematis. ( FIV > fev bags POPP —> AEKP= FMA + bradatitep= -/Saee + Dogero= S¢o00 CTncrewe ta Gk Pha £200 ) 2>. Lrability = 28,000 < Fiuy= Saco —> Gum revegzeol = Fi) — tue hasie = So0r0 —loncoo = > fa Loss recequired. >. & Gum wecgquited The property cloprenates (Fit =Sa0no < foo basts=[eqn70) —2 AEP = — EXP husrs + bebibly = lagers 428,000 aa "= <7 Gero ( Vereae EX Phy) SQe00.Example Sweetwater Corporation declared a stock divi common stock shareholders of record on December 31, 2013. Shareholders will receive 1 share of Sweetwater | common stock for each 5 shares of commion stock they | already own. Pierre Dorgan owns 500 shares of Sweetwater common stock with a tax basis of $150 per share. The fainmarket value of the Sweetwater common ‘stock was $90°pér share on December 31. What is Pierre's income tax basis in-his new and existing common stock in ‘Sweetwater, assuming the distribution is non-taxable? C shaves ——»> get | Shaw O shaves ——-> get. [oo stapsd tle 0 f00 "4 - ; 000 ew Old hasrs/shore X old charesrshors, hw hans per chore. = oa 160 %(ihawe x Soo 29Example 18-17 Assume Walk owns_25 shares out of 125 425000 shares that SCR issues. This year, SCR aaa redeemed five shares of his stock in Redemption | exchange for $25,000. Walt has a tax basis _ Cmts in the five shares of SCR stock of $10,000 ($2,000 per share). Is this qualified for stock redemption? How much dividend or capital gain should Walk recognize? If not, how many shares does SCR need to redeem to @ be qualified? : L_ofd penser s 2° eg “Tre = 20% j OTe qualify fv subsheubed. hs proparbovad 3 doled shoves oli test # yew wanwslep F = 9g teal the Substuubal. tes€é ~ Bee x 20% - 164 Xx. —> herveynnea chrrelevds.= 25000 (He peokwypton cub) £5 hod af the substarted. fest, rs met 7 Recewnited lap Gun == Reclewptoy Aw — soe hess) the recta) Shee = Soe — © (shares) X 2000 flare. ce =. [Seo ea ee Co Suppose X shewes poedl ty be. reemedl do gaalify pr Sealand, : 205 - 2 (e. [gs ets fe : ea Ge X=LIG > b slaves. ™ [6% (l26-x) =25-X / Ketsad vyExample | eee Crystal, inc. is owned equally by John and his wife Arlene, —~) foacy abbiuedag each of whom own 500 shares in the company. Arlene wants to reduce her ‘ownership in the company, and it was applies, $5,000 per share on December 31, 2013. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? What is her tax basis in the remaining shares? Mle 7b, Avkve ond Toba we sodeck te fil ctttrbider rekon, Arlene's ceustnedve prenersbiyn (Add. “ns sees) R Arlew's reves shaves + Tolls Shaves Pefore [ Toked Shara ~ a After < Arkue's pew shevee + Eba'sslies (Sov 200 to tila = -[co, Toth nerd shaves (S00-2ew) 1600 Op hy bekinberl fesb > inte iia e Redlewphon Art = 200 X Sccchwe = bevv,ooB (ax Fasis wa the renuneg shave (300) Per share — old hesis fe Lenin Shaye reckecuneed stares! has Remermng Shavet _Teted bases fell) : _ £00 (fasos)X [oo Plaee-1y Resecrrrng phere ues ccna Boo Shh hee