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 Topic: Dividends ( Topic Closed)
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arushi_13
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| Posted: 08 Jul 2009 at 10:59 | IP Logged
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I m trying to compare Q MCQs:
Q1. On Dec 31,2006 Gelt Corp. declared a dividend and distributed to its sole shareholder as a dividend in kind, a parcel of land that was NOT inventory asset. On the date of distribution, the following data were available:
Adjusted basis of land = 6,500
FMV = 14,000
Mortgage on land =5,000
For the year ended Dec 31,2006 Gelt had earnings and profit of $30,000 without regard to the dividend distribution. By how much should the dividend distribution reduce E and P of 2006?
Ans: (14000)+7500+5000= (1500)
Q2. Aztec Corp. distributed an asset to Burn, a shareholder. The asset's FMV = $30,000 and was subject to liab = 40,000 assumed by Burn. The asset had an adjusted basis = $25,000. What is the gain that must be recognized by the corp.?
Ans:$15,000
Use greater of FMV or Liab assumed = 40,000 - 25,000( adjusted basis) = $15,000.
Just wanted to verify if we can use the same logic as in Q1...(30,000)+40,000+5000 = $15,000. It gives the same answer but was just wondering whether it makes a difference when the assumption of liability by the shareholder is MORE or LESS than FMV.
Thanks for your help.
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bryris
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| Posted: 08 Jul 2009 at 13:17 | IP Logged
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Are you sure that Q1 answer of (1,500) is right?
I am getting (6,500). My logic is that if prop is dist to SH and liab is less than FMV, you can disregard the liability and calculate gain as 14,000 - 6,500 = 7,500 gain. 7,500 - distribution = (6,500).
My understanding is that you can disregard the liab unless it is larger than FMV, in which case you'd increase FMV to the liab amount.
I could be wrong and probably am.
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arushi_13
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| Posted: 08 Jul 2009 at 13:24 | IP Logged
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Thanks bryris and I double checked (1500) is the right answer.
I m not sure and I could be wrong but in my opinion in Q1 ....when the shareholder assumes the liability it will be considered as the shareholder giving money to the corp. So it will be considered receipt of boot by the corp. irrespective of the fact whether the Liability assumed is greater or less than FMV. The corp. should recognize this as gain recognized.
Again just my opinion...still would appreciate if you or someone else can clarify this.
Thanks a lot.
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bryris
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| Posted: 08 Jul 2009 at 13:25 | IP Logged
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That does make sense.
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