Assignment Problem: Theodore Corporation ("TC"), a C Corporation, is owned by one shareholder, Teddy. TC owns a parcel of land that it has owned for some years, and Teddy would like to own the land directly. Teddy would like to understand the amount of tax that he and TC will have to pay if the land is distributed to Teddy.
Here are some additional facts:
The fair market value of the land is $5,000,000;
TC has a tax basis in the land of $1,000,000;
TC has current and accumulated earnings and profits before this transaction of $1,000,000;
The corporate tax rate is 21%;
The individual tax rate on ordinary income is 37%; and
The tax rate on dividend income and capital gains is 20%
Teddy's basis in his TC stock is $300,000.
1. How will TC report this transaction on its tax return?
2. How much tax will TC pay, if any?
3. How will Teddy report this transaction on his tax return (i.e. dividend, sale or exchange, not taxable or some combination)?
4. How much tax will Teddy pay, if any?
5. What is Teddy's tax basis in the land?