Question

Petoskey Stone Quarry Inc. (PSQ), a calendar-year, accrual-method C corporation, provides landscaping supplies to local builders in northern Michigan. PSQ has always been a family-owned business and has a single class of voting common stock outstanding. The 500 outstanding shares are owned as follows: Number of shares Nick Adams 150 Amy Adams (Nick’s sister) 150 Abigail Adams (Nick’s daughter) 50 Charlie Adams (Nick’s son) 50 Sandler Adams (Nick’s father) 100 Total shares 500 Nick Adams serves as president of PSQ, and his father Sandler serves as chairman of the board. Amy is the company’s CFO, and Abigail and Charlie work as employees of the company. Sandler would like to retire and sell his shares back to the company. The fair market value of the shares is $450,000. Sandler’s tax basis is $10,500. The redemption is tentatively scheduled to take place on December 31 of this year. At the beginning of the year, PSQ had accumulated earnings and profits of $2,550,000. The company projects current E&P of $215,000. The company intends to pay pro rata cash dividends of $305 per share to its shareholders on December 1 of this year. Required: a. Assume the redemption takes place as planned on December 31 and no elections are made by the shareholders. 1. What amount of dividend or capital gain will Sandler recognize as a result of the stock redemption? 2. How will the tax basis of Sandler’s stock be allocated to the remaining shareholders? b. If Sandler files a proper election to waive the family attribution rules, what is the amount of his gain? c. Compute PSQ’s accumulated earnings and profits on January 1 of next year, assuming the redemption is treated as an exchange.

Answer 1

Sovtion ; 500 outstanding shares are owned as follows u shares are * Nick Adams - 150 * Amy Adams (Nick's sister) - 150 * Abigail Adams (Nick's daughten) - 50 * charlie Adoms (Nick's son]. - 50 * Sandies Adams [Nick's fathes] - 100 Total shares - 500 - NICK Adams Serves as president of psQ & his father Sandien Serves as chairman of the bounda -> Amy Adams is the company's CFO & Abigail & charlie work as employee of the company.. : faiy market value Share = $450,000 Sandier would like to relive & sen his shares. bacle. to the company. Sandiey's fox basis is $10,500

a) under the family attribution roles, Sandies is deemed to own the shares of Stock of his son Nick 150 and his goond and Abica il 50 charlic 50. He is not children deemed to own any of Amy's Stock 150 +50+50+100 a 500 i Sandley own . 350 SSO 500 . 0.7 . . toy) = 709. After redemption : redemption The redemption is tentatively sheduled to take place on Dec 31 of this year." from beginning of the year, Psa had accumulated Carnings & profits Of $9,550,000 The company projects Current Exp of $a15,000. The company intends to pay pro data cash dividends of $305 per Share to its Share hoiders on Decl of this year.

he does not waire the NOW assuming , the family attribution rules 150+50+50 1. Sandie is domed to ouons - 400 250 4100 = 0.625 = 62.5% Company has E&P to obsorb the distribution to Sandier on Dec 31 The company intends to pay þro data cash dividends of $ 305 pey Share to its Share holders on Dec I on this year is 147,500