General Inertia Corporation Made a Distribution of $50,000 to Henry

question 91

Multiple Choice

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

• A)Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share.
• B)Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share.
• C)Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share.
• D)Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

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Definitions:

Goodwill

An intangible asset that arises when a business is acquired for more than the fair value of its net identifiable assets, representing future economic benefits.

Capital Balances

Refer to the cumulative amounts of money or value that partners or shareholders have contributed to a company, inclusive of earnings and minus any losses.

Profits and Losses

A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period.

Billable Hours

The amount of an employee's work time that can be charged to a client, as in the context of professional services like legal advice or consultancy.