Question

Pursuant to a complete liquidation, Carrot Corporation distributes to its shareholders real estate held as an investment (basis of $1,188,400, fair market value of $1,544,920).

a. Determine the gain or loss recognized by Carrot on the distribution if no liability is involved. If no liability is involved, Carrot has a recognized on the distribution of $
b. Determine the gain or loss recognized by Carrot on the distribution if the real estate is subject to a liability of $1,307,240. If the real estate is subject to a liability of $1,307,240, Carrot has a recognized of $
c. Determine the gain or loss recognized by Carrot on the distribution if the real estate is subject to a liability of $1,663,760. If the liability were $1,663,760, Carrot's recognized on the distribution would be $ Caramel Corporation has 9,500 shares of stock outstanding. In a qualifying stock redemption, Caramel distributes $179,600 in exchange for 2,375 of its shares. At the time of the redemption, Caramel has paid-in-capital of $898,000 and E & P of $538,800. Calculate the reduction to Caramel's E&P as a result of the distribution. The result of this redemption is a $ charge to E & P.

Answer 1

Carrot Corporation recognizes a gain of $356,520 when distributing real estate without liability, $950,720 with a liability of $1,307,240, and $1,307,240 with a liability of $1,663,760. Caramel Corporation's reduction to E&P due to a stock redemption is not specified and would depend on the tax treatment of the distribution.

Step-by-step explanation:

The question involves calculating the gain or loss recognized by Carrot Corporation upon distributing real estate during a liquidation and the reduction to E&P for Caramel Corporation as a result of a stock redemption.

a. When Carrot Corporation distributes real estate in a complete liquidation without any liability, the gain recognized on the distribution is the fair market value minus the basis. Therefore, the recognized gain is $1,544,920 - $1,188,400 = $356,520.

b. If the real estate is subject to a liability of $1,307,240, Carrot Corporation would recognize a gain of $1,307,240 (liability) + $1,188,400 (basis) - $1,544,920 (fair market value) = $950,720.

c. If the liability were $1,663,760, Carrot's recognized gain on the distribution would be $1,663,760 (liability) + $1,188,400 (basis) - $1,544,920 (fair market value) = $1,307,240.

For Caramel Corporation, the reduction to E&P as a result of the distribution is calculated as the amount distributed $179,600 divided by the number of shares redeemed, 2,375, which equals $75.63 per share. However, if the distribution is treated as a dividend, it will reduce the E&P. The actual charge to E&P would depend on whether the distribution exceeds E&P or is made out of paid-in capital.