Question

Perch Corporation has made paint and paint brushes for the past ten years. Perch Corporation is owned equally by​ Arnold, an​ individual, and Acorn Corporation. Perch Corporation has​ $100,000 of accumulated and current​ E&P. Both Arnold and Acorn Corporation have a basis in their stock of​ $10,000. Perch Corporation discontinues the paint brush operation and distributes assets worth​ $10,000 each to Arnold and Acorn Corporation in redemption of​ 20% of their stock. Due to the​ distribution, Arnold and Acorn Corporation must report A. Arnold Acorn Corporation ​$8,000 capital gain ​$8,000 capital gain B. Arnold Acorn Corporation ​$10,000 dividend ​$10,000 dividend C. Arnold Acorn Corporation ​$10,000 dividend ​$8,000 capital gain D. Arnold Acorn Corporation ​$8,000 capital gain ​$10,000 dividend

Answer 1

D. Arnold = ​$8,000 capital gain, Acorn Corporation = ​$10,000 dividend

Step-by-step explanation:

Since Acron Corporation is a firm and not an individual, thus it is not entitled to any partial liquidating distribution.

He shall receive everything as dividend and nothing in exchange of his 20% partial share.

Thus, amount received by it shall be $10,000 dividend upto the value of accumulated earnings.

Further in case of Arnold being the individual his share = $10,000 - $2,000 is capital gain.

Acquisition base = $10,000
`*` 20% = $2,000

Amount received = $10,000

Thus, it shall be a capital gain = $10,000 - $2,000 = $8,000