General Inertia Corporation Made a Pro Rata Distribution of $50,000

question 89

Multiple Choice

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50 percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara'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 amount of dividend or capital gain does Tiara recognize because of the transaction?

• A) Tiara does not recognize any dividend income or capital gain.
• B) Tiara recognizes capital gain of $50,000.
• C) Tiara recognizes dividend income of $50,000.
• D) Tiara recognizes capital gain of $25,000.

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Definitions:

Bank Statement

A summary issued by a bank detailing all transactions in an account over a specific period of time.

Responsibility

The state or fact of having a duty to deal with something or of having control over someone, often involving ethical or moral obligations.

$100 Check

A written, dated, and signed instrument that directs a bank to pay a specific sum of money, in this case, one hundred dollars, to the bearer or to a specified person.

Citizens Bank

A generic name that can refer to any number of banks operated for the benefit of the citizens in a specific locality.