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

Since the distribution of assets is in redemption of stock, it will be treated as a stock redemption. As a result, both Arnold and Acorn Corporation will recognize capital gains or losses equal to the difference between the amount received ($10,000) and the adjusted basis in their stock ($5,000). Therefore, they will each report a long-term capital gain of $5,000 on their tax returns. Option B best reflects this outcome.

Perch Corporation Has Made Paint and Paint Brushes for the Past