V. A. X Corporation is a manufacturer of small appliances. X Corporation had two factories. A fire destroys one of the factories. The factory destroyed by the fire accounted for 20% of X Corporation’s gross revenue. 25% of X Corporation’s employees were employed at the factory and the net fair market value of the factory was 20% of X Corporation’s total net fair market value. X Corporation received insurance proceeds of $1,000,000. Rather than rebuilding the plant, X Corporation discharges its employees and distributes the $1,000,000 to Adams, its sole shareholder. Adams’ basis in his X Corporation stock is $200,000. X Corporation has earnings and profits of $2,000,000. What are the tax consequences to Adams?
1. Assume X Corporation had merely sold the factory rather than it being destroyed by a fire. How would that affect your answer to Part A?
B. X Corporation is engaged in various lines of business. On June 1, 2000, it distributes the assets of its retail shoe division to Adams, its sole shareholder. The retail shoe division represented 10% of the net fair market value of X Corporation and had been operated since 1975. It was the last division established by X Corporation. X Corporation continued to operate the other divisions following the distribution to Adams, its sole shareholder. The net fair market value of the assets of the retail shoe division was $1,000,000. Adams’ basis in his X Corporation stock was $2,000,000. The earnings and profits of X Corporation were $3,000,000. What are the tax consequences to Adams?
0 comments