Masselle, Inc. sells bloviators, a kind of flotation device that is filled with hot air from the wearer breathing into a tube. It has been in business for 15 years. Five years ago, it made the election to be taxed as an S corporation. At the end of the current year, it has a balance in its AAA account of $275,000 and an E&P balance from prior years as a corporation of $600,000. Recently, Massalle's sole shareholder, Joan, who invented the bloviator, received a purchase offer from an unrelated investor. The investor offered to purchase the company for $1,750,000--$100,000 to be distributed by Massalle to Joan immediately prior to the acquisition, and $1,650,000 to be paid to Joan in exchange for all her Masselle stock immediately following the distribution from Masselle. The investor also requires that Joan make the appropriate election to have the corporation distribute E&P before AAA. Joan's tax basis in her Masselle stock is $650,000.

a. How will the distribution be reported by Joan for tax purposes?

b. How much gain will Joan recognize on the sale of her stock to the outside investor?

c. How much more income tax will Joan pay as a result of structuring the transaction this way, rather than just selling all her stock to the outside buyer for $1,750,000? Assume Joan will be in the highest tax bracket with respect to dividend income.

Answer rating: 100% (QA)

Answer a The distribution will be reported by Joan for tax purposes as a dividend b Joan will recogn... View the full answer