Question 67. Petoskey Stone Quarry, Inc. (PSQ), a calendar year, accrual

67. Petoskey Stone Quarry, Inc. (PSQ), a calendar year, accrual basis C Corporation, provides landscaping supplies to local builders in northern Michigan. PSQ has always been a family owned business and has a single class of voting common stock outstanding. The 500 outstanding shares are owned as follows:

Nick Adams serves as President of PSQ, and his father Sandler serves as Chairman of the Board. Amy is the company’s CFO, and Abigail and Charlie work as employees of the company. Sandler would like to retire and sell his shares back to the company. The fair market value of the shares is $500,000. Sandler’s tax basis is $10,000.

The redemption is tentatively scheduled to take place on December 31 of this year. At the beginning of the year PSQ had accumulated earnings and profits of $2,500,000. The company projects current E&P of $200,000. The company intends to pay pro rata cash dividends of $300 per share to its shareholders on December 1 of this year.

a. Assume the redemption takes place as planned on December 31 and no elections are made by the shareholders.

b. What must Sandler and the other shareholders do to change the tax results you calculated in question a?

c. Compute PSQ’s accumulated earnings and profits on January 1 of next year assuming the redemption is treated as an exchange.

68. [comprehensive] Thriller Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

Joe Jackson 400

Mike Jackson (Joe’s son) 200

Jane Jackson (Joe’s daughter) 200

Vinnie Price (unrelated) 200

Total 1,000

Thriller Corporation has current E&P of $300,000 for this year and accumulated E&P at January 1 of this year of $500,000.

During this year, the corporation made the following distributions to its shareholders:

03/31: Paid a “dividend” of $10/share to each shareholder ($10,000 in total).

06/30: Redeemed 200 shares of Joe’s stock for $200,000. Joe’s basis in the 200 shares redeemed was $100,000.

09/30: Redeemed 60 shares of Vinnie’s stock for $60,000. His basis in the 60 shares was $36,000.

12/31: Paid a dividend of $10/share to each shareholder ($7,400 in total).

a. Determine the tax status of each distribution made this year. (Hint: First, consider if the redemptions are treated as dividend distributions or exchanges.)

b. Compute the corporation’s accumulated E&P at January 1 of next year.

Thriller Corporation first reduces its CE&P for the dividends paid during the current year:

c. Joe is considering retirement and would like to have the corporation redeem all of his shares for $100,000 plus a 10-year note with a fair market value of $300,000.

1. What must Joe do or consider if he wants to ensure that the redemption will be treated as an exchange.

2. Could Joe still act as a consultant to the company?

d. Thriller Corporation must pay attorney’s fees of $5,000 to facilitate the stock redemptions. Is this fee deductible?