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At the beginning of the year, Jenny, Inc. (a corporation for tax purposes) had a negative $15,000 in E&P. During the year,
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the company had $5,000 in profits. On July 1, the company distributed property with an adjusted basis of
$50,000 and a fair market value of $40,000 to Jenny (an individual), the sole shareholder of the corporation. It was
the only distribution that the company made during the year. Jenny’s stock in the company had a fair market
value of $50,000 and an adjusted basis of $20,000.
Please address the following:
- What is the amount of the distribution to Jenny?
- What are the federal tax consequences to Jenny of the distribution?
- What are the federal tax consequences to Jenny, Inc. of the distribution?
- What alternative transaction would have given Jenny and Jenny Inc.a better result here?