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

question 111

Multiple Choice

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated 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 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. 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:

Average Tax Rate

The percentage of total income allocated towards taxes, determined by dividing the taxpayer's total tax payment by their overall income.

Marginal Tax Rate

The tax rate applied to the last dollar of income, representing the rate at which additional income is taxed.

Taxable Income

The portion of an individual’s or corporation's income that is subject to taxes by the government.

Average Tax Rate

The ratio of the total taxes paid to the overall income, found by dividing the aggregate amount paid in taxes by the total income.