On March 1, Cream Corporation Transfers All of Its Assets

question 55

Essay

On March 1, Cream Corporation transfers all of its assets to Coffee Corporation in exchange for 10% of its common voting stock. At the time of the reorganization, Cream has assets valued at $4 million basis of $3 million), and its earnings and profits account shows a deficit of $650,000. Coffee's earnings and profits as of March 1 were
$420,000. Due to the reorganization, Coffee has an NOL for the current year of $150,000. Coffee still declares its usual dividends of $100,000 paid on April 30, August 31, and December 31 $300,000 of total dividends).
How are the Coffee shareholders taxed on the distribution?

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Definitions:

Indebtedness

The condition of owing money or being under financial obligation to others, which could include loans or issued bonds.

Profitability

A measure of how efficiently a company or business generates profit in relation to its revenue.