Silver Corporation redeems all of Alluvia's 3,000 shares and distributes to her 1,000 shares of Gold Corporation stock plus $20,000 cash.Alluvia's basis in her 30% interest in Silver is $80,000 and the stock's market value is $120,000.At the time Silver is acquired by Gold,the accumulated earnings and profits of Silver are $100,000 and Gold's are $50,000.How does Alluvia treat this transaction for tax purposes?
A)No gain is recognized by Alluvia in this reorganization.
B)Alluvia reports a $20,000 recognized dividend.
C)Alluvia reports a $20,000 recognized capital gain.
D)Alluvia reports a $15,000 recognized dividend and a $5,000 capital gain.
E)None of the above.

Question

Quizplus · Accepted Answer

When Silver Corporation redeems all of Alluvia's 3,000 shares and distributes to her 1,000 shares of Gold Corporation stock plus $20,000 cash, it is treated as a distribution of property to Alluvia. As a result, Alluvia must recognize the fair market value of the Gold Corporation stock and the cash as taxable income. Alluvia's basis in Silver was $80,000, and the stock's market value was $120,000. Thus, she has a $40,000 recognized gain. However, Alluvia's portion of Silver's accumulated earnings and profits also must be accounted for in this transaction. Since Silver has accumulated earnings and profits of $100,000 at the time of the acquisition, Alluvia's portion of this is $30,000 (30% of $100,000). Therefore, she also recognizes a $20,000 dividend. The recognized gain of $40,000 plus the recognized dividend of $20,000 equals the $60,000 total taxable income that Alluvia must report on her tax return.

Silver Corporation Redeems All of Alluvia's 3,000 Shares and Distributes