Jeff, an individual, owns all of the outstanding common stock in Macon Utilities Corporation. Jeff purchased his Macon stock seven years ago and his basis is $10,000. At the beginning of the current year, Macon had $27,000 of accumulated earnings and profits and no current earnings and profits. Determine the tax consequences to Jeff and Macon in each of the following alternative situations:

a. Macon distributes inventory ($22,000 fair market value; $13,000 basis) to Jeff.

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

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

d. Assume Macon has $17,000 of current earnings and profits (in addition to $27,000 of accumulated earnings and profits) and it distributes to Jeff land ($22,000 fair market value; $32,000 basis) which it held as an investment.

Compare the result if Macon first sold the land and then distributed the proceeds.

e. Assume again that Macon has $27,000 of accumulated earnings and profits at the beginning of the current year. Macon distributes machinery used in its business ($12,000 fair market value, zero adjusted basis for taxable income purposes, and $4,000 adjusted basis for earnings and profits purposes). The machinery is fiveyear property and has a seven-year class life, was purchased by Macon for

$14,000 on July 1 of year one when it was fully expensed under § 168(k), and the distribution is made on January 1 of year seven.

Answer rating: 100% (QA)

a Macon recognizes 9000 of ordinary income as per 311b and increase in current EP by 9000 The entire ... View the full answer