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Aggie Corporation made a distribution of $571,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year. Rusty, an individual, owns 100 shares (100 percent) of Aggie Corporation. The distribution was in exchange for 50 percent of Rusty’s stock in the company. At the time of the distribution, the shares had a fair market value of $150 per share. Rusty’s income tax basis in the shares was $37 per share. Aggie had total E&P of $8,275,000 at the time of the distribution.
a. What is the amount and character (capital gain or dividend) of any income or gain recognized per share by Rusty as a result of the partial liquidation?
b. Assuming Aggie made no other distributions to Rusty during the year, by what amount does Aggie reduce its total E&P as a result of the partial liquidation?

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Answer:

A. $113

B. $571,000

Explanation:

A. Calculation for What is the amount and character (capital gain or dividend)

Using this formula

Capital gain or dividend=Fair market value -Income tax basis

Let plug in the formula

Capital gain or dividend=$150 per share-$37 per share

Capital gain or dividend=$113

Therefore the amount and character (capital gain or dividend) of any income or gain recognized per share by Rusty as a result of the partial liquidation is $113

B. Calculation for the amount that Aggie reduce its total E&P as a result of the partial liquidation

Based on the information given in a situation where the liquidation is been treated as an exchange, it means that Aggie will either lower its E&P by the amount of ($571,000) or by the pro-rata amount of the E&P which is calculated as (50% × $8,275,000 = $4,137,5000).

Therefore the amount that Aggie will reduce its total E&P as a result of the partial liquidation will be the amount of $571,000.

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