Sylvia Owns 25% of Cormorant Corporation

question 165

Essay

Sylvia owns 25% of Cormorant Corporation. Cormorant sells diamonds to retail jewelry businesses. While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year, its current E & P is $500,000. Since the company had a successful year, Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15. Three shareholders receive cash, but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000) to Sylvia in lieu of cash. Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income. What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

---

Definitions:

Payment Interval

The interval at which payments are issued, like monthly, every three months, or once a year.

Periodic Interest Rate

The interest rate charged or paid over a particular period of time, often less than a year, such as monthly or quarterly.

Annuity

A monetary product ensuring regular payouts to an individual, commonly incorporated into strategies for retirement.

Payment Interval

The frequency at which payments are made or received, such as monthly, quarterly, or annually.