1 Jason, Inc , is owned by two individual (i e , noncorporate) shareholders as follows Ms A owns 80 and Mr B owns the remaining 20 The corporation adopted a plan of complete liquidation on 3 3 x1 The corporation's balance sheet just prior to making liquidating distributions was as follows Cash, $300,000 Investment portfolio, adjusted basis $40,000, FMV $100,000 Land factory building, adjusted basis $800,000, FMV $600,000 The Investment portfolio plus $100,000 cash will bedistributed to Mr B the Land factory building plus $200,000 cash will bedistributed to Ms A Which of the following statements is most correct A Both the $60,000 gain and the $200,000 loss will be recognized by Jason, Inc B The $60,000 gain will be recognized by Jason, Inc , but not the $200,000 loss C The $200,000 loss will be recognized by Jason, Inc , but not the $60,000 gain D Neither the $60,000 gain nor the $200,000 loss will be recognized by Jason, Inc E None of the answers is correct 2 Steven is a 25 shareholder of ABC, Inc (25,000 shares owned of 100,000 shares outstanding, long term holding period) His stock basis is $150 per share, and the market value of ABC stock is $400 per share Steven is not related to any of the other shareholders of ABC Steven wants toraise some cash from the disposition ofsome of his stock For each of the following independent stock dispositions, select the answer that most correctly describes Steven's tax consequences ABC has a very large balance in E P Steven will sell 5,000 shares of ABC stock to an unrelated party for $400 per share Steven will redeem 5,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share However, another shareholder has previously announced her intention to retire to an island paradise Accordingly, in a couple of months, she redeemed her entire stock holding of 15,000 shares a) Steven will report a $1,750,000 long term capital gain b)None of the other answers is correct c) Steven will reportlong term capital gainof $2,800,000 d)Steven will reportlong term capital gainof $2,000,000 e)Steven will report dividend income of $1,750,000 f)Steven will report dividend income of $2,000,000 g) Steven will report a $1,250,000 long term capital gain h)Steven will report dividend income of $2,800,000 i) Steven will report dividend income of $1,250,000 3 Big Shot, Inc , has been negotiating with Smallco, Inc , to purchase its assets for an amount that the two corporations agree represents fair market value However, the two corporations have not been able to agree on what that fair market value figure is Smallco's adjusted basis in its assets is $450,000 Big Shot and Smallco finally agree on an asset purchase price of $600,000 Following its sale of all its property to Big Shot, Smallco adopts a plan of complete liquidation and quickly distributes the cash received from Big Shot for its assets to the Smallco shareholders in cancellation of their stock Smallco ceases to exist as a going concern Big Shot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, Big Shot abandons its efforts to acquire the assets in a direct purchase Instead, Big Shot is able to acquire 100 of Smallco's outstanding stock for $750,000 Big Shot immediately makes an election under sec 338 to treat the stock purchase as an asset acquisition An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000 Smallco immediately adopts a plan of complete liquidation Big Shot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, Big Shot abandons its efforts to acquire the assets in a direct purchase Instead, Big Shot is able to acquire 100 of Smallco's outstanding stock for $750,000 However, due to executive turnover in the CFO's function, Big Shot fails to make a timely election under sec 338 An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000 Smallco immediately adopts a plan of complete liquidation Big Shot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, Big Shot abandons its efforts to acquire the assets in a direct purchase Instead, Big Shot is able to acquire 100 of Smallco's outstanding stock for $750,000 However, due to executive turnover in the CFO's function, Big Shot fails to make a timely election under sec 338 An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000 Because Big Shot failed to make an election under sec 338, it is decided to keep Smallco going as a wholly owned subsidiary a The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big Shot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, the price paid by Big Shot for the Smallco stock, which results in gain recognition for Smallco of $150,000 Also as a result of the sec 338 election, Big Shotassigns a basis to the Smallco assets of $600,000, thefair market value ofSmallco's assets Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern B None of the answers is correct C Smallco recognizes a gain of $150,000 on the sale of its assets to Big Shot With respect to Smallco, the liquidating distribution of cash to its shareholders results in no additional tax consequences for Smallco With respect to Big Shot, it assigns a cost basis of $600,000 to the assets acquired D The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big Shot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $750,000, the price paid by Big Shot for the Smallco stock, which results in gain recognition for Smallco of $300,000 Also as a result of the sec 338 election, Big Shotassigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern E The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big Shot nor Smallco recognizing either gain or loss In the absence of a sec 338 election, Big Shot takes the Smallco assets with a carryover basis (as well as other tax attributes, such as E P) F Because no sec 338 election is made by Big Shot, it is required to sell the Smallco stock back to the shareholders from whom the stock was bought for a 10 premium over the price paid (i e , $750,000 $75,000 $825,000) G Because Smallco is not liquidated, there are no direct tax consequences for Smallco Big Shot will carry its investment in Smallco on its balance sheet at a cost basis of $750,000 The two corporations would be eligible to elect to file consolidated returns going forward from the stock acquisition H The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big Shot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, fair market value, which results in gain recognition for Smallco of $150,000 Also as a result of the sec 338 election, Big Shotassigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern 3 On 12 31 x1, the balance in ZZ Corporation's accumulated E P account was $200,000 For the year 20x2, ZZ had a deficit in current E P of ($365,000) Answer each of the following independent questions (allow for some rounding differences) ZZ Corp distributed $100,000 cash on March 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it ZZ Corp distributed $100,000 cash on July 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it ZZ Corp distributed $100,000 cash on October 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it Referring to the other questions in this problem, if any part of a distribution is not treated as dividend income, how is this non dividend portion of the distribution characterized by the shareholders who received it A $200,000 B All tax free C Tax free to the extent of the shareholder's stock basis, with any remaining distribution treated as capital gain D $19,000 E $100,000 F $165,000 G All capital gain H None of the answers is correct I Capital gain to the extent of the shareholder's stock basis, with any remaining distribution tax free J $0 1 Jason, Inc , is owned by two individual (i e , noncorporate) shareholders as follows Ms A owns 80 and Mr B owns the remaining 20 The corporation adopted a plan of complete liquidation on 3 3 x1 The corporation's balance sheet just prior to making liquidating distributions was as follows Cash, $300,000 Investment portfolio, adjusted basis $40,000, FMV $100,000 Land factory building, adjusted basis $800,000, FMV $600,000 The Investment portfolio plus $100,000 cash will be distributed to Mr B the Land factory building plus $200,000 cash will be distributed to Ms A Which of the following statements is most correct A Both the $60,000 gain and the $200,000 loss will be recognized by Jason, Inc B The $60,000 gain will be recognized by Jason, Inc , but not the $200,000 loss C The $200,000 loss will be recognized by Jason, Inc , but not the $60,000 gain D Neither the $60,000 gain nor the $200,000 loss will be recognized by Jason, Inc E None of the answers is correct 2 Steven is a 25 shareholder of ABC, Inc (25,000 shares owned of 100,000 shares outstanding, longterm holding period) His stock basis is $150 per share, and the market value of ABC stock is $400 per share Steven is not related to any of the other shareholders of ABC Steven wants to raise some cash from the disposition of some of his stock For each of the following independent stock dispositions, select the answer that most correctly describes Steven's tax consequences ABC has a very large balance in E P a) b) c) d) e) f) Steven will sell 5,000 shares of ABC stock to an unrelated party for $400 per share Steven will redeem 5,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share However, another shareholder has previously announced her intention to retire to an island paradise Accordingly, in a couple of months, she redeemed her entire stock holding of 15,000 shares Steven will report a $1,750,000 longterm capital gain None of the other answers is correct Steven will report longterm capital gain of $2,800,000 Steven will report longterm capital gain of $2,000,000 Steven will report dividend income of $1,750,000 Steven will report dividend income of $2,000,000 g) h) i) 3 Steven will report a $1,250,000 longterm capital gain Steven will report dividend income of $2,800,000 Steven will report dividend income of $1,250,000 BigShot, Inc , has been negotiating with Smallco, Inc , to purchase its assets for an amount that the two corporations agree represents fair market value However, the two corporations have not been able to agree on what that fair market value figure is Smallco's adjusted basis in its assets is $450,000 BigShot and Smallco finally agree on an asset purchase price of $600,000 Following its sale of all its property to BigShot, Smallco adopts a plan of complete liquidation and quickly distributes the cash received from BigShot for its assets to the Smallco shareholders in cancellation of their stock Smallco ceases to exist as a going concern BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase Instead, BigShot is able to acquire 100 of Smallco's outstanding stock for $750,000 BigShot immediately makes an election under sec 338 to treat the stock purchase as an asset acquisition An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000 Smallco immediately adopts a plan of complete liquidation BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase Instead, BigShot is able to acquire 100 of Smallco's outstanding stock for $750,000 However, due to executive turnover in the CFO's function, BigShot fails to make a timely election under sec 338 An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000 Smallco immediately adopts a plan of complete liquidation BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase Instead, BigShot is able to acquire 100 of Smallco's outstanding stock for $750,000 However, due to executive turnover in the CFO's function, BigShot fails to make a timely election under sec 338 An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000 Because BigShot failed to make an election under sec 338, it is decided to keep Smallco going as a whollyowned subsidiary a The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, the price paid by Big Shot for the Smallco stock, which results in gain recognition for Smallco of $150,000 Also as a result of the sec 338 election, Big Shot assigns a basis to the Smallco assets of $600,000, the fair market value of Smallco's assets Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern B None of the answers is correct C Smallco recognizes a gain of $150,000 on the sale of its assets to Big Shot With respect to Smallco, the liquidating distribution of cash to its shareholders results in no additional tax consequences for Smallco With respect to Big Shot, it assigns a cost basis of $600,000 to the assets acquired D The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $750,000, the price paid by Big Shot for the Smallco stock, which results in gain recognition for Smallco of $300,000 Also as a result of the sec 338 election, Big Shot assigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern E The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss In the absence of a sec 338 election, Big Shot takes the Smallco assets with a carryover basis (as well as other tax attributes, such as E P) F Because no sec 338 election is made by Big Shot, it is required to sell the Smallco stock back to the shareholders from whom the stock was bought for a 10 premium over the price paid (i e , $750,000 $75,000 $825,000) G Because Smallco is not liquidated, there are no direct tax consequences for Smallco Big Shot will carry its investment in Smallco on its balance sheet at a cost basis of $750,000 The two corporations would be eligible to elect to file consolidated returns going forward from the stock acquisition H The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss However, as a result of the sec 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, fair market value, which results in gain recognition for Smallco of $150,000 Also as a result of the sec 338 election, Big Shot assigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock Smallco's tax attributes, such as E P, survive the liquidation, and Smallco ceases to exist as a going concern 3 On 12 31 x1, the balance in ZZ Corporation's accumulated E P account was $200,000 For the year 20x2, ZZ had a deficit in current E P of ($365,000) Answer each of the following independent questions (allow for some rounding differences) ZZ Corp distributed $100,000 cash on March 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it ZZ Corp distributed $100,000 cash on July 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it ZZ Corp distributed $100,000 cash on October 1, 20x2 How much of this distribution would be characterized as dividend income to the shareholders who received it Referring to the other questions in this problem, if any part of a distribution is not treated as dividend income, how is this non dividend portion of the distribution characterized by the shareholders who received it A $200,000 B All tax free C Tax free to the extent of the shareholder's stock basis, with any remaining distribution treated as capital gain D $19,000 E $100,000 F $165,000 G All capital gain H None of the answers is correct I Capital gain to the extent of the shareholder's stock basis, with any remaining distribution tax free J $0

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 15, 2024

1.Jason, Inc., is owned by two individual (i.e., noncorporate) shareholders as follows:Ms. A owns 80% and Mr. B owns the remaining 20%.The corporation adopted a

Cash, $300,000

Investment portfolio, adjusted basis $40,000, FMV $100,000

Land & factory building, adjusted basis $800,000, FMV $600,000

The "Investment portfolio" plus $100,000 cash will bedistributed to Mr. B; the "Land & factory building" plus $200,000 cash will bedistributed to Ms. A.Which of the following statements is most correct?

A.Both the $60,000 gain and the $200,000 loss will be recognized by Jason, Inc.

B.The $60,000 gain will be recognized by Jason, Inc., but not the $200,000 loss.

C.The $200,000 loss will be recognized by Jason, Inc., but not the $60,000 gain.

D.Neither the $60,000 gain nor the $200,000 loss will be recognized by Jason, Inc.

E.None of the answers is correct

2.Steven is a 25% shareholder of ABC, Inc. (25,000 shares owned of 100,000 shares outstanding, long-term holding period).His stock basis is $150 per share, and the market value of ABC stock is $400 per share.Steven is not related to any of the other shareholders of ABC.Steven wants toraise some cash from the disposition ofsome of his stock.For each of the following independent stock dispositions, select the answer that most correctly describes Steven's tax consequences.ABC has a very large balance in E&P.

Steven will sell 5,000 shares of ABC stock to an unrelated party for $400 per share.

Steven will redeem 5,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share.

Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share.

Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share.However, another shareholder has previously announced her intention to retire to an island paradise.Accordingly, in a couple of months, she redeemed her entire stock holding of 15,000 shares.

a)Steven will report a $1,750,000 long-term capital gain

b)None of the other answers is correct

c)Steven will reportlong-term capital gainof $2,800,000

d)Steven will reportlong-term capital gainof $2,000,000

e)Steven will report dividend income of $1,750,000

f)Steven will report dividend income of $2,000,000

g)Steven will report a $1,250,000 long-term capital gain

h)Steven will report dividend income of $2,800,000

i)Steven will report dividend income of $1,250,000

3.Big-Shot, Inc., has been negotiating with Smallco, Inc., to purchase its assets for an amount that the two corporations agree represents fair market value.However, the two corporations have not been able to agree on what that fair market value figure is.Smallco's adjusted basis in its assets is $450,000.

Big-Shot and Smallco finally agree on an asset purchase price of $600,000.Following its sale of all its property to Big-Shot, Smallco adopts a plan of complete liquidation and quickly distributes the cash received from Big-Shot for its assets to the Smallco shareholders in cancellation of their stock.Smallco ceases to exist as a going concern.

Big-Shot and Smallco are unable to agree as to the fair market value of the Smallco assets.Accordingly, Big-Shot abandons its efforts to acquire the assets in a direct purchase.Instead, Big-Shot is able to acquire 100% of Smallco's outstanding stock for $750,000.Big-Shot immediately makes an election under sec. 338 to treat the stock purchase as an asset acquisition.An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000.Smallco immediately adopts a plan of complete liquidation.

Big-Shot and Smallco are unable to agree as to the fair market value of the Smallco assets.Accordingly, Big-Shot abandons its efforts to acquire the assets in a direct purchase.Instead, Big-Shot is able to acquire 100% of Smallco's outstanding stock for $750,000.However, due to executive turnover in the CFO's function, Big-Shot fails to make a timely election under sec. 338.An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000.Smallco immediately adopts a plan of complete liquidation.

Big-Shot and Smallco are unable to agree as to the fair market value of the Smallco assets.Accordingly, Big-Shot abandons its efforts to acquire the assets in a direct purchase.Instead, Big-Shot is able to acquire 100% of Smallco's outstanding stock for $750,000.However, due to executive turnover in the CFO's function, Big-Shot fails to make a timely election under sec. 338.An objectivevaluation of Smallco's assets determines that the fair market value of said assets is $600,000.Because Big-Shot failed to make an election under sec. 338, it is decided to keep Smallco going as a wholly-owned subsidiary.

a. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big-Shot nor Smallco recognizing either gain or loss.However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, the price paid by Big-Shot for the Smallco stock, which results in gain recognition for Smallco of $150,000.Also as a result of the sec. 338 election, Big-Shotassigns a basis to the Smallco assets of $600,000, thefair market value ofSmallco's assets.Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern.

B. None of the answers is correct

C. Smallco recognizes a gain of $150,000 on the sale of its assets to Big-Shot.With respect to Smallco, the liquidating distribution of cash to its shareholders results in no additional tax consequences for Smallco.With respect to Big-Shot, it assigns a cost basis of $600,000 to the assets acquired.

D. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big-Shot nor Smallco recognizing either gain or loss.However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $750,000, the price paid by Big-Shot for the Smallco stock, which results in gain recognition for Smallco of $300,000.Also as a result of the sec. 338 election, Big-Shotassigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock.Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern.

E. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big-Shot nor Smallco recognizing either gain or loss.In the absence of a sec. 338 election, Big-Shot takes the Smallco assets with a carryover basis (as well as other tax attributes, such as E&P).

F. Because no sec. 338 election is made by Big-Shot, it is required to sell the Smallco stock back to the shareholders from whom the stock was bought for a 10% premium over the price paid (i.e., $750,000 + $75,000 = $825,000).

G. Because Smallco is not liquidated, there are no direct tax consequences for Smallco.Big-Shot will carry its investment in Smallco on its balance sheet at a cost basis of $750,000.The two corporations would be eligible to elect to file consolidated returns going forward from the stock acquisition.

H. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither Big-Shot nor Smallco recognizing either gain or loss.However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, fair market value, which results in gain recognition for Smallco of $150,000.Also as a result of the sec. 338 election, Big-Shotassigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock.Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern.

3. On 12/31/x1, the balance in ZZ Corporation's accumulated E&P account was $200,000.??For the year 20x2, ZZ had a deficit in current E&P of ($365,000).??Answer each of the following independent questions?(allow for some rounding differences).

ZZ Corp. distributed $100,000 cash on March 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it?

ZZ Corp. distributed $100,000 cash on?July 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it?

ZZ Corp. distributed $100,000 cash on?October 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it?

Referring to the other questions in this problem, if any part of a distribution is not treated as dividend income, how is this non-dividend portion of the distribution characterized by the shareholders who received it.

$200,000

All tax-free.

Tax-free to the extent?of the shareholder's stock basis, with any remaining distribution treated as capital gain.

$19,000

$100,000

$165,000

All capital gain.

None of the answers is correct

Capital gain?to the extent?of the shareholder's stock basis, with any remaining distribution tax-free.

1. Jason, Inc., is owned by two individual (i.e., noncorporate) shareholders as follows: Ms. A owns 80% and Mr. B owns the remaining 20%. The corporation adopted a plan of complete liquidation on 3/3/x1. The corporation's balance sheet just prior to making liquidating distributions was as follows - Cash, $300,000 Investment portfolio, adjusted basis $40,000, FMV $100,000 Land & factory building, adjusted basis $800,000, FMV $600,000 The "Investment portfolio" plus $100,000 cash will be distributed to Mr. B; the "Land & factory building" plus $200,000 cash will be distributed to Ms. A. Which of the following statements is most correct? A. Both the $60,000 gain and the $200,000 loss will be recognized by Jason, Inc. B. The $60,000 gain will be recognized by Jason, Inc., but not the $200,000 loss. C. The $200,000 loss will be recognized by Jason, Inc., but not the $60,000 gain. D. Neither the $60,000 gain nor the $200,000 loss will be recognized by Jason, Inc. E. None of the answers is correct 2. Steven is a 25% shareholder of ABC, Inc. (25,000 shares owned of 100,000 shares outstanding, longterm holding period). His stock basis is $150 per share, and the market value of ABC stock is $400 per share. Steven is not related to any of the other shareholders of ABC. Steven wants to raise some cash from the disposition of some of his stock. For each of the following independent stock dispositions, select the answer that most correctly describes Steven's tax consequences. ABC has a very large balance in E&P. a) b) c) d) e) f) Steven will sell 5,000 shares of ABC stock to an unrelated party for $400 per share. Steven will redeem 5,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share. Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share. Steven will redeem 7,000 shares of his ABC stock in exchange for a redemption distribution of $400 per share. However, another shareholder has previously announced her intention to retire to an island paradise. Accordingly, in a couple of months, she redeemed her entire stock holding of 15,000 shares. Steven will report a $1,750,000 longterm capital gain None of the other answers is correct Steven will report longterm capital gain of $2,800,000 Steven will report longterm capital gain of $2,000,000 Steven will report dividend income of $1,750,000 Steven will report dividend income of $2,000,000 g) h) i) 3. Steven will report a $1,250,000 longterm capital gain Steven will report dividend income of $2,800,000 Steven will report dividend income of $1,250,000 BigShot, Inc., has been negotiating with Smallco, Inc., to purchase its assets for an amount that the two corporations agree represents fair market value. However, the two corporations have not been able to agree on what that fair market value figure is. Smallco's adjusted basis in its assets is $450,000. BigShot and Smallco finally agree on an asset purchase price of $600,000. Following its sale of all its property to BigShot, Smallco adopts a plan of complete liquidation and quickly distributes the cash received from BigShot for its assets to the Smallco shareholders in cancellation of their stock. Smallco ceases to exist as a going concern. BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets. Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase. Instead, BigShot is able to acquire 100% of Smallco's outstanding stock for $750,000. BigShot immediately makes an election under sec. 338 to treat the stock purchase as an asset acquisition. An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000. Smallco immediately adopts a plan of complete liquidation. BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets. Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase. Instead, BigShot is able to acquire 100% of Smallco's outstanding stock for $750,000. However, due to executive turnover in the CFO's function, BigShot fails to make a timely election under sec. 338. An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000. Smallco immediately adopts a plan of complete liquidation. BigShot and Smallco are unable to agree as to the fair market value of the Smallco assets. Accordingly, BigShot abandons its efforts to acquire the assets in a direct purchase. Instead, BigShot is able to acquire 100% of Smallco's outstanding stock for $750,000. However, due to executive turnover in the CFO's function, BigShot fails to make a timely election under sec. 338. An objective valuation of Smallco's assets determines that the fair market value of said assets is $600,000. Because BigShot failed to make an election under sec. 338, it is decided to keep Smallco going as a whollyowned subsidiary. a. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss. However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, the price paid by Big-Shot for the Smallco stock, which results in gain recognition for Smallco of $150,000. Also as a result of the sec. 338 election, Big-Shot assigns a basis to the Smallco assets of $600,000, the fair market value of Smallco's assets. Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern. B. None of the answers is correct C. Smallco recognizes a gain of $150,000 on the sale of its assets to Big-Shot. With respect to Smallco, the liquidating distribution of cash to its shareholders results in no additional tax consequences for Smallco. With respect to Big-Shot, it assigns a cost basis of $600,000 to the assets acquired. D. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss. However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $750,000, the price paid by Big-Shot for the Smallco stock, which results in gain recognition for Smallco of $300,000. Also as a result of the sec. 338 election, Big-Shot assigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock. Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern. E. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss. In the absence of a sec. 338 election, Big-Shot takes the Smallco assets with a carryover basis (as well as other tax attributes, such as E&P). F. Because no sec. 338 election is made by Big-Shot, it is required to sell the Smallco stock back to the shareholders from whom the stock was bought for a 10% premium over the price paid (i.e., $750,000 + $75,000 = $825,000). G. Because Smallco is not liquidated, there are no direct tax consequences for Smallco. Big-Shot will carry its investment in Smallco on its balance sheet at a cost basis of $750,000. The two corporations would be eligible to elect to file consolidated returns going forward from the stock acquisition. H. The liquidation of Smallco is a liquidation of a subsidiary, which results in neither BigShot nor Smallco recognizing either gain or loss. However, as a result of the sec. 338 election, Smallco is treated as having sold to itself all of its assets for $600,000, fair market value, which results in gain recognition for Smallco of $150,000. Also as a result of the sec. 338 election, Big-Shot assigns a basis to the Smallco assets of $750,000, the price paid for the Smallco stock. Smallco's tax attributes, such as E&P, survive the liquidation, and Smallco ceases to exist as a going concern. 3. On 12/31/x1, the balance in ZZ Corporation's accumulated E&P account was $200,000.??For the year 20x2, ZZ had a deficit in current E&P of ($365,000).??Answer each of the following independent questions?(allow for some rounding differences). ZZ Corp. distributed $100,000 cash on March 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it? ZZ Corp. distributed $100,000 cash on?July 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it? ZZ Corp. distributed $100,000 cash on?October 1, 20x2.? How much of this distribution would be characterized as dividend income to the shareholders who received it? Referring to the other questions in this problem, if any part of a distribution is not treated as dividend income, how is this non-dividend portion of the distribution characterized by the shareholders who received it. A. $200,000 B. All tax-free. C. Tax-free to the extent?of the shareholder's stock basis, with any remaining distribution treated as capital gain. D. $19,000 E. $100,000 F. $165,000 G. All capital gain. H. None of the answers is correct I. Capital gain?to the extent?of the shareholder's stock basis, with any remaining distribution tax-free. J. $0