Question

During the current year, Gnatcatcher, Inc., (E & P of $1 million) distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders acquired their shares five years ago. Each shareholder is in the 33% tax bracket, and each had a $45,000 basis in her reedemed stock.
a. Assume the distribution to Brandi is a qualifying stock redemption. Determine Brandi's tax liability on the distribution.

b. Assume the distribution to Yuen is a nonqualified stock redemption. Determine Yuen's tax liability on the distribution.

Answer 1

Answer:

a. Brandi's tax liability on the distribution is $23,250

b. Yuen's tax liability on the distribution is $30,000

Explanation:

Given

Amount = $200,000

Tax bracket = 33%

Redeem Stock = $45,000 basis

a.

First, we calculate the taxable dividend.

Taxable dividend is calculated by subtracting the redeemed stock from the total amount.

Taxable dividend = Amount - Redeemed Stock

Taxable dividend = $200,000 - $45,000

Taxable dividend = $155,000

Brandi's tax liability on the distribution is calculated as: Taxable dividend * tax rate

Tax liability = $155,000 * 15%

Tax liability = $23,250

Hence, Brandi's tax liability on the distribution is $23,250

b. With an assumption that the distribution to Yuen is a nonqualified stock redemption.

Yuen's tax liability on the distribution is calculated as follows;

Tax liability = Amount * Tax rate

Tax liability = $200,000 * 15%

Tax liability = $30,000

Hence, Yuen's tax liability on the distribution is $30,000

Answer 2

Answer:

a. Brandi's tax liability on the

distribution = $23,250

b. Yuen's tax liability on the distribution = $30,000

Explanation:

A. To determine Brandi's tax liability on the distribution we first find taxable divided which we have as follows

Taxable dividend = actual dividend released – adjusted stock value

Actual dividend released = $200,00

Adjusted stock value = $45,000

Total divided = 200,000 – 45,000

= $155,000

Tax = Taxable dividend * tax rate

= 155,000×15%

=$ 23,250

B. Let's Determine Yuen's tax liability, which is

Tax = taxable dividend × tax rate

= 200,000 ×15%

= $30,000