Question

Eli Corp. is an accrual basis calendar year C Cor. With 100,000 shares of voting common stock issued and outstanding as of Dec. 28, Year 1. On Friday, Dec. 29, Year 1, Hall surrendered 2,000 shares or Eli stock to Eli in exchange for $33,000 cash. Hall had no direct interest in Eli after the stock surrender.

Additional Information:

Hall’s adjusted basis in 2,000 shares of Elm on 12/28/01 ($8 per share) $16,000

Eli’s accumulated E&P at 1/1/01 $25,000

Eli’s Year 1 net operating loss (7,000)

What amount of income did Hall recognize from the stock surrender?

Answer 1

IN THIS QUESTION WE HAVE TO FIND OUT THE INCOME ,HALL RECOGNIZE FROM THE STOCK SURRENDER

AS WE KNOW THAT HALL SURRENDERED 2000 SHARES FOR $33000

ADJUSTED BASIS, IE, ALL THAT COST ASSOCIATED WITH THE STOCK OF HALL IS $16000

ACCUMULATED EARNING AND PROFITS, MEANS THE NET PROFIT OF THE COMPANY AFTER PAYING DIVIDEND TO STAKEHOLDERS IS $25000 ON FIRST JANUARY 2001

BUT THE OPERATING LOSS OF THE COMPANY FOR THE YEAR 2001 IS $7000

SO THE NET OPERATING LOSS CAN BE ADJUSTED FROM ADJUSTED EARNING AND PROFIT

$25000-$7000=$18000

HALL SURRENDERED THE STOCK FOR $33000 WHICH HE PURCHASED FOR $16000

SO THE INCOME OF HALL WILL BE $33000-$16000= $17000 AND CONVERT THIS AMOUNT TO THE CURRENT STOCK VALUE OF THE COMPANY BASED ON COMPANYS PROFIT