Partial Liquidation - Tax Consequences to Individual and Corporate Shareholders
ID: 2461534 • Letter: P
Question
Partial Liquidation - Tax Consequences to Individual and Corporate Shareholders (LO. 1, 2)
For the last eleven years, Lime Corporation has owned and operated four different trades or businesses. Lime also owns stock in several corporations that it purchased for investment purposes. The stock in Lime Corporation is held equally by Sultan, an individual, and by Turquoise Corporation. Both Sultan and Turquoise own 1,500 shares in Lime that were purchased nine years ago at a cost of $50 per share. Determine whether the following independent transactions qualify as partial liquidations under § 302(b)(4). In each transaction, determine the tax consequences to Lime Corporation, to Turquoise Corporation, and to Sultan.
a. Lime Corporation sells one of its trades or businesses (basis of $400,000, fair market value of $500,000) and distributes the proceeds equally to Sultan and Turquoise Corporation in redemption of 750 shares from each shareholder. Lime Corporation has E & P of $1,000,000 as of the date of the distribution.
The redemption will qualify as a partial liquidation as to Sultan. As a result Sultan has recognized gain of $ and Turquoise has dividend income of $ .
Lime Corporation will have a recognized gain of $ on the sale of the trade or business.
Explanation / Answer
Partial Liquidation is restricted only to the non corporate shareholders. In given question, Sultan being a non corporate shareholder qualifies for partail liquidation but Turquoise Corporation being corporate shareholder doesnot allow for partial liquidation.
Gain for Sultan:
Share on fair market value of trade = $250,000 i.e. $500,000 equally divided
Basis in Stock redeemed (750 shares *$50) = $37500
Recognised Gain = $250,000 - $37,500 = $212,500
Hence, gain for sultan is $212,500.
Dividend Income for Turquoise Corporation:
Dividend Income = $ 250,000
Dividend Received = 80% *$250000 = $200,000
Dividend Income to recognised = $250,000 -$200,000 = $80,000
Gain for lime corporation:
Fair Market Value = $500,000
Cost price = $400,000
Gain = $ 100,000
Reduction in E&P - Distribution to sultan = $1,000,000 *750shares/3000 shares = $250,000
Reduction in E&P - Distribution to Turquoise = $250000
Total Reduction in E&P = $250,000 +$250,000 = $500,000