Jeff and John organized Tampa Corporation 18 years ago and have each owned 50% of the corporation since its inception. In the current year, Tampa reports ordinary income/taxable income of $40,000. Assume the business does not qualify for the U.S. production activities deduction. On April 5, Tampa distributes $100,000 cash to Jeff and distributes land with a $100,000 FMV and a $70,000 adjusted basis to John. Tampa had purchased the land as an investment two years ago. What are the tax implications to Tampa, Jeff, and John of the land distribution in each of the four situations that follow?
a. Tampa has been a C corporation since its formation. On January 1 of the current year, Jeff’s basis in his stock is $50,000, and John’s stock basis is $45,000. Tampa has accumulated E&P of $155,000 on January 1 of the current year.
b. Tampa was formed as a C corporation but made an S election three years after its formation. On January 1 of the current year, Jeff’s basis in his stock is $100,000, and John’s stock basis is $80,000. Tampa had the following earnings balances on January 1 of the current year:
Accumulated Adjustments Account………………….. $125,000
Accumulated E&P …………………………………… 30,000
c. Tampa was formed as a partnership and continues to operate in that form. On January 1 of the current year, Jeff’s basis in his partnership interest is $100,000, and John’s partnership basis is $80,000. The partnership has no liabilities and no unrecognized precontribution gains.
d. How would your answers to Parts a–c change if the land held as an investment and then distributed to John had been contributed to Tampa by Jeff two years ago? At the time of Jeff’s contribution, the land had a FMV of $95,000 and a $70,000 basis.