Question

1. Walker Corporation distributes to its shareholder Brayden (an individual s/h) a piece of land with FMV $1,000,000. Walker purchased the land ten years ago for $600,000. Walker’s current E&P is $200,000 and its accumulated E&P is $50,000. Brayden’s stock basis is $475,000. Brayden owns 85 shares (85%) of Walker Corporation. The remaining 15 shares (25%) are owned by an unrelated party. (6.5 Points)

1. What are the tax consequences to Walker Corp and Brayden if this is a nonliquidating distribution?
2. What are the tax consequences to Walker Corp and Brayden if this is a liquidating distribution instead?
3. What are the tax consequences to Walker Corp and Brayden if this is a stock redemption instead and in exchange for the land Walker Corp redeems 51 of Brayden’s shares?
4. If you were advising Walker Corp and Brayden on scenarios a-c listed above, which scenario would you advise them to proceed with and why?

Answer 1

a. Walker Corp has earned a gross profit of $ 400,000.00 by way of selling acquired land @ $ 600,000.00 and it is Taxable along term capital gain , inorder to avoid this tax it can invest in the land and profit earned need to be transfferred to P & L and it will be charged with Corporate taxes along with normal profit, with reference to Brayden's there is no tax implecation because their is no distribution of income and it is not taxable in the hand of Braydens.

b.Walker Corp has earned a gross profit of $ 400,000.00 by way of selling acquired land @ $ 600,000.00 and it is Taxable along term capital gain, and it is transffered to P&L   and if it is used to distribute it further dividend tax need to be collected from the share holders  and then need to be remitted to Share holders.

c.walker Corp sells the land at a loss to Brayens in exchange stock and it need to be charged to P&L , in the hands of Brayen the difference between FMV of Land and Cost of acqustion on Shares need to be charged to pay tax.

d. In my opinion , if we are in the shoes of Walker Corp , in the option a company need to pay corporate tax additional , where as option b it will be bared by the Share holders and option c is loss to the Walker Corp. option b is best.

Where as in Brayers shoes Option C is best because profit by exchange of partly redeemption of shares , at the same time he is losing the controll over compnay.