Taxation of Reorganizations & Liquidations

Dividends Problem 1

ABC Corp (ABC) was formed 15 years ago by Able and Body (2 individuals). ABC uses the cash method of accounting and reports on a calendar year basis. A & B still own 100 shares each of the 200 shares of ABC. On 3/01 of the current year, ABC distributed $40,000 in total - $20,000 each to A and B, and 9/30 of the current year, ABC distributed $70,000 in total - $35,000 each to A and B. No other distributions were made by ABC during the current year.

Assume A's adjusted basis in his ABC shares is $26,000, Bs adjusted basis in his ABC shares is $40,000.

Question:

Unless otherwise stated, assume that the figure for A/E&P is the accumulated earnings and profits (or deficit) of ABC as of January 1st of the current year. Assume that's the figure for C/E&P is the current earnings and profits (or deficit) of ABC during the current year. Treat each situation separately and characterize the distributions to A & B.

Answer the following scenarios:

1. A/E&P is $50,000 and C/E&P is $40,000
2. A/E&P is $0 and C/E&P is $45,000
3. A/E&P is $(90,000) and C/E&P is $40,000
4. A/E&P is $(55,000) and C/E&P is $(30,000)