[Vanessachy]

Question about capital gain on E & P

So basically current E & P and accumulated E & P are taxable dividends, then no E & P is the return of the capital, but capital gain confuses me. According to Becker it is the exceed amount over E & P and basis (no EP, no basis). But when I did a question on Becker HW, I am confused, see below

Elm Corp is an accrual-basis calendar-year c corp with 100,000 shares of voting common stock issued and outstanding as of Dec 28, year 1. On Friday, Dec 29, year 1, Hall surrendered 2000 share of ELM stock in exchange for 33,000 for cash. Hall had no direct or indirect interest in Elm after the surrender. Additional information below:

Hall’s adj basis in 2,000 shares of Elm on Dec 29, year 1 is 16,000

Elm’s accumulated earnings and profits at Jan 1, year 1 is 25,000

Elm’s year 1 net op loss is (7000)

what amount of income did Hall recognize from stock surrender?

Answer is use 33000-16000=17000 capital.

If the concept is no EP and no basis, it should be 33000-(25000-7000+16000)

Far, 64 82
Reg, 60 86
Aud, 74 82
Bec, 70 81
Done done done! I did it!!!
Licensed CPA in MA, issued October 2016

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Senk Tank]

The most important part is the call of the question. Its asking what was Hall's income in regards to tax effect, not Elm's tax effect.

So it is the $33k (cash in) – $16K (basis) = $17K capital gain.

Embrace the Pain

"Quality over Quantity" - Tony Horton, P90X

AUD - 84 10/2015
REG - 91 2/2016
BEC - 5/28/2016

[Vanessachy]

@Bryan, OMG, didn't think about that, thank you! I need to be more careful!

Far, 64 82
Reg, 60 86
Aud, 74 82
Bec, 70 81
Done done done! I did it!!!
Licensed CPA in MA, issued October 2016

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[nib]

hello,

I was wondering , what would be answer for Elm's tax effect. .???

just check below calculation is correct or wrong ?

if new base =(25000-7000+16000) = 34000

cash given out =33000 < 34000 base

33000= non taxable

.

[Senk Tank]

They are selling the stock, not getting a dividend so E&P isnt relevant.

Embrace the Pain

"Quality over Quantity" - Tony Horton, P90X

AUD - 84 10/2015
REG - 91 2/2016
BEC - 5/28/2016

[Author]

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