Question

Cowboy Corporation owns​ 90% of the single class of stock in Doggie Corporation. The other​ 10% is owned by​ Miguel, an individual.​ Cowboy's basis in its Doggie Corporation stock is​ $100,000 and​ Miguel's basis is​ $50,000. Doggie Corporation distributes property having an adjusted basis of​ $150,000 and an FMV of​ $500,000 to Cowboy​ Corporation, and​ $60,000 of money to Miguel as a liquidating distribution. Doggie and Cowboy Corporations must recognize gain​ of _________

Answer 1

Doggie Corporation must recognize a gain of $350,000, which is the difference between the FMV of the distributed property ($500,000) and its adjusted basis ($150,000). This is analogous to investors in Babble, Inc. considering dividends and rate of return when valuing shares.

Step-by-step explanation:

In the case of Doggie Corporation, which is distributing property and cash as a liquidating distribution to its majority shareholder, Cowboy Corporation, and a minority shareholder, Miguel, there is a need to determine the gain recognition by the corporations involved. When property is distributed in liquidation, the corporation recognizes gain or loss as if the property were sold at its fair market value (FMV). Doggie Corporation has property with an adjusted basis of $150,000 and an FMV of $500,000. Thus, Doggie Corporation must recognize a gain of $350,000, which is the difference between the FMV ($500,000) and the adjusted basis ($150,000).

Considering the case of Babble, Inc., a similar concept applies. Investors would consider the expected dividend payouts when determining what they would pay for a share of stock in the company. Those expected dividends represent the company's profit distribution to shareholders over the company's remaining life.

Additionally, it is crucial to note that investors expect a rate of return on their investments, which could come in the form of dividends or capital gains. The anticipation of such returns impacts the value an investor might be willing to pay for a share of stock.