General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50 percent)of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

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DThe distribution is considered a partial liquidation, which is treated as a sale or exchange of the stock. Henry's capital gain is calculated as the difference between the distribution amount ($50,000) and his basis in the surrendered shares (250 shares * $100/share = $25,000), resulting in a $25,000 capital gain. Since the fair market value of the shares at the time of the distribution was $200 per share, and Henry continues to hold shares after the transaction, his basis in the remaining shares would adjust to reflect the current fair market value, which is $200 per share.

General Inertia Corporation Made a Distribution of $50,000 to Henry