Perch Corporation has made paint and paint brushes for the past ten years. Perch Corporation is owned equally by Arnold, an individual, and Acorn Corporation. Perch Corporation has $100,000 of accumulated and current E&P. Both Arnold and Acorn Corporation have a basis in their stock of $10,000. Perch Corporation discontinues the paint brush operation and distributes assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock. Due to the distribution, Arnold and Acorn Corporation must report:

Question

Quizplus · Accepted Answer

The distribution in redemption of stock is treated as a sale of 20% of Arnold and Acorn Corporation's stock in Perch Corporation. The amount realized is $10,000, which equals the value of the assets distributed. The basis in their stock is $10,000. Therefore, the gain recognized by each shareholder is $0 (amount realized of $10,000 minus basis of $10,000). The remaining $80,000 of E&P is not distributed and remains with Perch Corporation.

Perch Corporation Has Made Paint and Paint Brushes for the Past