To share its profits with its two equal shareholders, Orange Corporation and Gustavo, it distributes cash of
Question:
To share its profits with its two equal shareholders, Orange Corporation and Gustavo, it distributes cash of $200,000 to Orange and real estate worth $300,000 (adjusted basis of $20,000) to Gustavo. The real estate is subject to a mortgage of $100,000, which Gustavo assumes.
The distribution is made on December 31, Lime's year-end. Lime Corporation has had both good and bad years in the past. More often than not, however, it has lost money. Despite this year's banner profits, the GAAP-based balance sheet for Lime indicates a year-end deficit in retained earnings.
Consequently, the distribution of cash and land is treated as a liquidating distribution for financial reporting purposes, resulting in a reduction of Lime's paid-in capital account. The tax consequences of the distributions to Lime Corporation and its shareholders depend on a variety of factors that are not directly related to the financial reporting treatment.
Identify the factors and explain the tax effects of the distributions to both Lime Corporation and its two shareholders.
Intermediate Accounting Volume 2
ISBN: 9781260881240
8th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel