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

question 56

Multiple Choice

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31,year 1.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 as a result 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:

Perpetual Inventory System

An accounting approach that continuously updates inventory records after each transaction, providing a real-time view of inventory levels.

Liability Credited

A credit entry in accounting representing an increase in liabilities, reflecting that a company has received something of value for which it must pay in the future.

Asset Debited

An accounting entry that increases the value of an asset account.

F.O.B. Destination

A shipping term indicating that the seller bears the shipping costs and maintains ownership and responsibility for the goods until they are delivered to the buyer's specified location.