Financial Case

Question 42

Harry’s basis of the land is $300,000. And Harry has a dividend of $180,000(300,000-120,000) because of the liability. The dividend should be taxable for Harry. After dividend distribution, Lime Corporation would have a $230,000 on E&P, since Harry needs to assume the liability of the land. (350,000- 120,000).

Question 47

Jacob’s basis of the stock was $24,000. Since he received a stock dividend of additional 2,000 shares, Jacob held 12,000 (10,000+2,000) shares in total. Therefore, Jacob’s basis of each stock was $2(24,000/12,000). He sold the additional 2,000 shares for $18,000, and his gain was $14,000($18,000-2*2,000). Because the dividend shares that Jacob received are non-taxable dividend, thus, Jacob’s gain of $14,000
from selling the additional 2,000 shares was long-term capital gain.

Question 52

a. Not qualified for complete termination redemption. After Cyan Corporation selling Angelica’s entire shares, it retains 2,000 shares. Because Angelica is Dean’s mother, and Dean owns 1,500 shares of stock, which accounts for 75% (1,500/2,000) of the total number of shares. Since Angelica remains the director of the company, the family attribution waiver cannot be qualified.
b. Qualified for the complete termination redemption. Angelica loaned Cyan Corporation $100,000, and Angelica became the creditor of the company. As long as she meets all the requirement of family attribution wavier, the redemption should qualified for complete termination.
c. Qualified for the complete termination redemption. Dean’s position in Cyan Corporation will not impact Angelica’s interest in the company. Therefore, as long as the family attribution wavier requirements are meet, Angelica’s ownership can be completely terminated.
d. Not qualified for complete termination redemption. Because within 10 years, Angelica received Cyan’s stock. In addition, Angelica has 75% of the interest of the remaining stocks. Thus, the family attribution waiver is not satisfied. Therefore, the redemption is not qualified as complete termination redemption.

Question 53

a.
Lori has a dividend income of $6,000 and Swan Corporation’s profit would be decreased by $6,000. Since Lori used $6,000 to purchase the 500 shares of stock from Robert, Lori’s basis of the newly stocks would be $6,000. Robert would realize a capital gain of $515,000 (600,000-85,000) from selling all his 500 shares. Purchasing and selling stocks between Robert and Lori would not affect Swan Corporation.
b. Robert would realize a capital gain from redeeming his shares to Swan Corporation. The gain would be $515,000(600,000-85,000), and this would make Lori the solo shareholder of the company. The redemption was considered as complete termination redemption. Swan Corporation has a decline on the E&P since Robert redeemed all his shares. The E&P would decreased by half million U.S. dollar.

Question 56

Crane Corporation’s E&P would be decreased because of the stock redemption. Before the stock redemption, Crane had 2,000 shares outstanding with $1,200,000 E&P. Therefore, each share of stock accounts for $600(1,200,000/2,000). Crane redeemed 500 shares, which accounted for $300,000. Thus, after redemption, the E&P would be decreased by $300,000. For the expenses during redemption, the $13,000 accounting and legal fees was not qualified to be deducted, but the $18,500 interest expense was
d