Sylvia Owns 25% of Cormorant Corporation, Which Sells Diamonds to Retail

question 164

Essay

Sylvia owns 25% of Cormorant Corporation, which 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?

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Definitions:

Bisexual

Refers to an individual who is attracted to both male and female genders.

Asexual

A sexual orientation characterized by a lack of sexual attraction to others, or low or absent interest in or desire for sexual activity.

Sexual Orientation

Sexual orientation refers to an enduring pattern of romantic or sexual attraction to persons of the opposite sex, same sex, both sexes, or more than one gender.

Gender Identity

Refers to an individual's personal sense of their own gender, which may or may not correspond to the sex assigned at birth.