Question

Raven Corporation owns three machines that it uses in its business. It no longer needs two of these machines and is considering distributing them to its two shareholders as a property dividend. The machines have a fair market value of $20,000 each. The basis of each machine is as follows: A, $27,000; B, $20,000; and C, $12,000. Raven has asked you for advice. What do you recommend?

Answer 1

Sell Machine A and distribute cash to one of the shareholders.

Distribute Machine B to the other shareholder because there is no gain on the distribution and no deductible loss

Machine C can then be retained

Step-by-step explanation:

If Machine A is distributed, it will result in a non-deductible loss of $ 7,000 ( 27,000- 20,000). Hence, to preserve the loss which will help to reduce tax base, the company should consider selling it and give the cash generated on it to one of the shareholders.

If Machine B is distributed, it will yield neither gain nor loss. Since it doesn't have any tax implication whether distributed or sold, the company should consider given it to the other shareholder.

As for Machine C, this should be retained, because Raven will have to pay tax on the assumed gain if it is distributed.