Heather, an individual, owns all of the outstanding stock in Silver Corporation. Heather purchased her stock in Silver nine years ago, and her basis is $56,000. At the beginning of this year, the corporation has $76,000 of accumulated earnings and profits and no current earnings and profits (before considering the effect of the distributions). What are the tax consequences to Heather (amount and type of income and basis in property received) and Silver Corporation (gain or loss and effect on earnings and profits) in each of the following situations?
Silver distributes land to Heather. The land was held as an investment and has a fair market value of $54,000 and an adjusted basis of $42,000.
Assume that Silver Corporation has no current or accumulated earnings and profits prior to the distribution. How would your answer change?
Assume that the land distributed to Heather is subject to a $46,000 mortgage (which Heather assumes). How would your answer change?
Assume that the land has a fair market value of $54,000 and an adjusted basis of $62,000 on the date of the distribution. How would your answer change?
Instead of distributing land to Heather, assume that Silver decides to distribute equipment used in its business. The equipment has a $14,000 market value, a $1,200 adjusted basis for income tax purposes, and a $5,200 adjusted basis for earnings and profits purposes. When the equipment was purchased four years ago, its original fair market value was $18,000.
Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus. Assume that the tax rates are 28% for Kristen and 34% for Egret Corporation.
How much better off would Kristen be if she were paid a dividend rather than salary?
How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend?
If Egret Corporation pays Kristen a salary bonus of $40,000 instead of a $30,000 dividend, how would your answers to above change?
What should Kristen do?