Question

To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?

a. Aida will have $400,000 of dividend income.

b. Aida will have a $100,000 basis in the land.

c. Turaco Corporation will recognize a gain of $50,000.

d. Aida will recognize a gain of $30,000.

e. None of the above.

Answer 1

Answer :-

The correct answer is option d - Aida will recognize a gain of $30,000.

Explanation :-

Here option a and b is totally wrong as there is no dividends is declared as Turaco Corporation transfer land for investment purposes to Aida, a shareholder.

Recognized gain or loss of Turaco Corporation =Fair value of land - land basis

Recognized gain or loss of Turaco Corporation =$400,000 - $250,000 =$150,000

Therefore, Recognize gain of Turaco Corporation is $150,000 not $50,000.Then the option C is also incorrect.

Now we will calculate the Aida recognize gain.

First we calculate the fair market value net of liability because in the question $300,000 given as liability.

Fair market value net of liability = Fair market value of land - Liability

Fair market value net of liability =$400,000 - $300,000

Fair market value net of liability =$100, 000

Aida Recognize gain = Fair market value net of liability - Aida stock basis

Aida Recognized gain = $100,000 - $70,000 =$30,000

Thus the option D is correct answer.