Zane, an individual, owns all of the outstanding common stock in XYZ Utilities Corporation. Zane purchased his XYZ stock seven (7) years ago and his basis is $8,000. Before the transactions listed below, XYZ has $25,000 of accumulated earnings and profits and no current earnings and profits. Determine the tax consequences to Zane and XYZ in each of the following alternative situations: (a) XYZ distributes inventory ($20,000 fair market value; $11,000 basis) to Zane. (b) Same as (a) above, except that, before the distribution, XYZ had no accumulated earnings and profits.
Zane, an individual, owns all of the outstanding common stock in XYZ Utilities Corporation. Zane purchased his XYZ stock seven (7) years ago and his basis is $8,000. Before the transactions listed below, XYZ has $25,000 of
(a) XYZ distributes inventory ($20,000 fair market value; $11,000 basis) to Zane.
(b) Same as (a) above, except that, before the distribution, XYZ had no accumulated earnings and profits.
Accumulated earnings and profits are the company profits after paying the stockholders dividends and serve as measure of economic ability to pay such kind of cash distributions.
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