Facts:

Luke and Leia each own 50% of the stock of Skywalker, Inc. Luke and Leia are brother and sister and have owned the stock for more than two years. Before the distributions, Lukes stock basis was $100,000 and Leias stock basis was $150,000. During the current year, Skywalker, Inc. made the following distributions to its two shareholders:

Skywalker, Inc.

Distributions to Shareholders

Stock Basis

$100,000

$150,000

Shareholder

Luke

Leia

Property Distributed

Land on Tatooine

Land on Alderaan

FMV of Land

$75,000

$75,000

Corp. Tax Basis in Land

$40,000

$120,000

Skywalker, Inc. had $200,000 of Earnings and Profits immediately before the distributions. Prepare a tax memorandum explaining the tax impacts on Skywalker, Inc. and the two shareholders of the distributions. Assume that Skywalkers tax rate is 21%; that the two shareholders would pay tax on dividends and/or capital gains at a tax rate of 20%; and the two shareholders will pay tax on any ordinary income at a tax rate of 35%.

Review the above facts and answer the following questions in your memorandum:

1. What is the impact on the Corporations taxable income for each distribution and how much tax will the Corporation pay?

2. What will the Corporations Earnings and Profits be after the distributions and after the payment of any tax?

3. What type of income is it to each shareholder and how much tax will each pay?

4. What will be each shareholders tax basis in the land and what will be each shareholders stock basis due to the distributions?