Question

Zane, an individual, owns all of the outstanding common stock in Sturdley Utilities Corporation. Zane purchased his Sturdley stock seven years ago and his basis is $8,000. At the beginning of the current year, Sturdley had $25,000 of accumulated earnings and profits and no current earnings and profits. Determine the tax consequences to Zane and Sturdley in each of the following alternative situations:

(a) Sturdley distributes inventory ($20,000 fair market value; $11,000 basis) to Zane.

(b) Same as (a), above, except that, before the distribution, Sturdley has no current or accumulated earnings and profits.

(c) Sturdley distributes land ($20,000 fair market value; $11,000 basis) which it has used in its business. Zane takes the land subject to a $16,000 mortgage.

(d) Assume Sturdley has $15,000 of current earnings and profits (in addition to $25,000 of accumulated earnings and profits) and it distributes to Zane land ($20,000 fair market value; $30,000 basis) which it held as an investment. Compare the result if Sturdley first sold the land and then distributed the proceeds.

(e) Assume again that Sturdley has $25,000 of accumulated earnings and profits at the beginning of the current year. Sturdley distributes machinery used in its business ($10,000 fair market value, zero adjusted basis for taxable income purposes, and $2,000 adjusted basis for earnings and profits purposes). The machinery is five-year property and has a seven-year class life, was purchased by Sturdley for $14,000 on July 1 of year one (no § 179 election was made), and the distribution is made on January 1 of year seven. See I.R.C. §§ 168 (g)(2), 312(k)(3); Reg. § 1.312-15(d).