Question

Aggie 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 percent of Aggie Corporation. The distribution was in exchange for 50 percent 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. Aggie 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 Aggie made no other distributions to Rusty during the year, by what amount does Aggie reduce its total E&P as a result of the partial liquidation?

Answer 1

a. $150 per share

b. $500,000

Step-by-step explanation:

a. The computation of the income or gain recognized is shown below:

= Fair market value - share based on income tax

= $200 - $50

= $150 per share

This reflects the capital gain, not the dividend as it is an exchange for owning the corporation with the partial liquidation

b. The computation of reducing the amount is shown below:

The reduced amount would be lower of distribution amount or exchange amount

The distribution would be = $500,000

Exchange amount = Total E&P × given percentage

= $8,000,000 × 50%

= $4,000,000

So, it would reduced by $500,000