Aggie Corporation made a distribution of $524,000 to Rusty Cedar in partial liqu
ID: 2552703 • Letter: A
Question
Aggie Corporation made a distribution of $524,000 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 $153 per share. Rusty’s income tax basis in the shares was $45 per share. Aggie had total E&P of $8,450,000 at the time of the distribution.
What is the amount and character (capital gain or dividend) of any income or gain recognized by Rusty as a result of the partial liquidation?
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?
Explanation / Answer
1) What is the amount and character (capital gain or dividend) of any income or gain recognized by Rusty as a result of the partial liquidation?
Answer: An individual receives exchange treatment on distributions in partial liquidation of stock. As a result, Rusty reports capital gain of $108 per share of stock exchanged ($153- $45).
2) 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: Since the liquidation is treated as an exchange, Aggie reduces its E&P by the lesser of the amount distributed ($524,000) or the pro-rata amount of the E&P attributable to the redeemed percentage amount (50% * $8,450,000 = $4,225,000). In such scenario, Aggie reduces its E&P by $524,000