General Inertia Corporation Made a Distribution of $50,000 to Henry

question 90

Multiple Choice

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry'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 are the tax consequences to Henry because of the transaction?

• A) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share.
• B) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share.
• C) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share.
• D) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

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Definitions:

Marginal Tax Rate

The rate at which the last dollar of income is taxed, indicating the proportion of additional income that is paid in taxes.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Net Working Capital

The difference between a company's current assets and its current liabilities, indicating the liquidity and short-term financial health of the business.

After-tax Cash Inflow

The net amount of cash that remains after all tax obligations have been subtracted from total revenue.