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Memorandum - 2

To: Ms. Emma Shire

From:

Date: September 1st, 2021

Subject: Corporation Issue - Clifford Company

It has come to our attention that Clifford Company is assessing whether or not they should make a property distribution (dividend) for three of their machines that are used for business. Two out of the three machines are no longer needed and their total fair market value is $20,000 per machine. The basis for each machine are as followed: Machine A, $27,000; Machine B, $20,000; and Machine C, $12,000. After looking into your case, we have assessed the tax implications that go along with the distribution of the machines.

If the fair market value for the distributed property is higher than the cost basis, the company has to recognize the sale as a gain. According to 26 U.S. Code 311, if a corporation distributes property to a shareholder in a distribution to which the fair market value of such property exceeds its adjusted basis the gain shall be recognized to the distributing corporation as if such property were sold to the distribute at its fair market value. To determine if there is a gain or not, you would have to take the difference between the fair market value and the tax basis. If there is a profit, it would be added to the companys earnings and profits. If the fair market value is less than the cost basis, it would not be recognized as a loss for the company. Distributing Machine A will result in a nondeductible loss of $7,000. This is because the basis of Machine A is $27,000 where the fair market value is $20,000. Distributing Machine B will have no gain or loss because both the fair market value and the basis are $20,000. Distributing Machine C will result in a taxable gain of $8,000. This is because the basis of Machine C is $12,000 and the fair market value is $20,000.

After analyzing these conclusions, I would recommend Clifford Company to distribute Machine A and B. I recommend this because they both have a fair market value that is equal to or less than the basis which would result in the best tax options for the company. I would also recommend that Machine C should be kept in order to avoid the taxable gain recognition. According to 26 U.S. Code 301, the distribution portion that is dividend should be included in gross income and the portion of the distribution that is not dividend should be treated as a gain from the sale or exchange of the property.

ANSWER THIS -

HAVE YOU THOUGHT ABOUT DONATING THE TWO MACHINES AND WHAT WOULD THIS DO TO YOUR OVERALL RECCOMENDATION?