Question 61. [LO5] EG Corporation redeemed 200 shares of stock from one of its shar

61. [LO5] EG Corporation redeemed 200 shares of stock from one of its shareholders in exchange for $200,000. The redemption represented 20% of the corporation’s outstanding stock. The redemption was treated as an exchange by the shareholder. By what amount does EG reduce its total E&P as a result of the redemption under the following E&P assumptions?

a. EG’s total E&P at the time of the distribution was $2,000,000.

b. EG’s total E&P at the time of the distribution was $500,000.

62. [LO5] {research} Spartan Corporation redeemed 25% of its shares for $2,000 on July 1 of this year, in a transaction that qualified as an exchange under §302(a). Spartan’s accumulated E&P at the beginning of the year was $2,000. Its current E&P is $12,000. Spartan made dividend distributions of $1,000 on June 1 and $4,000 on August 31. Determine the beginning balance in Spartan’s accumulated E&P at the beginning of the next year. See Rev. Rul. 74-338, 1974-2 C.B. 101 and Rev. Rul. 74-339, 1974-2 C.B. 103 for help in making this calculation.

63. [LO5] Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $3,000, and Clyde owns the remaining 40 shares with a basis of $12,000. At year end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of these stock redemption transactions qualify for sale or exchange treatment.

a. Getaway redeems 10 of Bonnie’s shares for $2,000. Getaway has $20,000 of E&P at year end and Bonnie is unrelated to Clyde.

b. Getaway redeems 25 of Bonnie’s shares for $4,000. Getaway has $20,000 of E&P at year end and Bonnie is unrelated to Clyde.

c. Getaway redeems 10 of Clyde’s shares for $2,500. Getaway has $20,000 of E&P at year end and Clyde is unrelated to Bonnie.

64. [LO6] Spartan Corporation made a distribution of $500,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100% of Spartan Corporation. The distribution was in exchange for 50% of Rusty’s stock in the company. At the time of the distribution, the shares had a fair market value of $200 per share. Rusty’s income tax basis in the shares was $50 per share. Spartan had total E&P of $8,000,000 at the time of the distribution.

a. What is the amount and character (capital gain or dividend) of any income or gain recognized per share by Rusty as a result of the partial liquidation?

b. Assuming Spartan made no other distributions to Rusty during the year, by what amount does Spartan reduce its total E&P as a result of the partial liquidation?

65. [LO6] Wolverine Corporation made a distribution of $500,000 to Rich Rod, Inc. in partial liquidation of the company on December 31 of this year. Rich Rod, Inc. owns 100% of Wolverine Corporation. The distribution was in exchange for 50% of Rich Rod, Inc.’s stock in the company. At the time of the distribution, the shares had a fair market value of $200 per share. Rich Rod, Inc.’s income tax basis in the shares was $50 per share. Wolverine had total E&P of $8,000,000 at the time of the distribution.

a. What is the total amount and character (capital gain or dividend) of any income or gain recognized by Rich Rod, Inc. as a result of the partial liquidation?

b. Assuming Wolverine made no other distributions to Rich Rod, Inc. during the year, by what amount does Wolverine reduce its total E&P as a result of the partial liquidation?

Comprehensive problems

66. Lanco Corporation, an accrual-method corporation, reported taxable income of $1,460,000 this year.

Included in the computation of taxable income were the following items:

• MACRS depreciation of $200,000. Straight line depreciation would have been $120,000.
• A net capital loss carryover of $10,000 from last year
• A net operating loss carryover of $25,000 from last year
• $65,000 capital gain from the distribution of land to the company’s sole shareholder (see below)

Not included in the computation of taxable income were the following items:

• Tax-exempt income of $5,000
• Life insurance proceeds of $250,000
• Excess current year charitable contribution of $2,500 (to be carried over to next year)
• Tax-deferred gain of $20,000 on a like-kind exchange
• Federal income tax refund from last year of $35,000
• Non-deductible life insurance premium of $3,500
• Non-deductible interest expense of $1,000 on a loan used to buy tax-exempt bonds

Lanco paid federal income taxes this year of $496,400. The company’s accumulated E&P at the beginning of the year was $2,400,000.

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