Z-Sisters Corporation has one class of voting common stock, ofwhich 1,000 shares are issued and outstanding. The shares are ownedas follows:
Shares| Lourdes Vick | 400 |
| Anita Vick(Lourdes’s daughter) | 200 |
| Liz Vick (Lourdes’sdaughter) | 200 |
| Cat Labrillazo(unrelated) | 200 |
| Total | 1000 |
Z-Sisters Corporation has current E&P of $300,000 for thisyear and accumulated E&P at January 1 of this year of$500,000.
During this year, the corporation made the followingdistributions to its shareholders:
03/31: Paid a dividend of $10/share to eachshareholder ($10,000 in total).
06/30: Redeemed 200 shares of Lourdes’s stockfor $200,000. Lourdes’s basis in the 200 shares redeemed was$100,000.
09/30: Redeemed 60 shares of Cat’s stock for$60,000. His basis in the 60 shares was $36,000.
12/31: Paid a dividend of $10/share to eachshareholder ($7,400 in total).
Determine the tax status of each distribution made this year.(Hint: First, consider if the redemptions are treated as dividenddistributions or exchanges.)
Compute the corporation’s accumulated E&P at January 1 ofnext year.
Lourdes is considering retirement and would like to have thecorporation redeem all of her shares for $100,000 plus a 10-yearnote with a fair market value of $300,000.
What must Lourdes do or consider if she wants to ensure that theredemption will be treated as an exchange?
Could Lourdes still act as a consultant to the company?
Z-Sisters Corporation must pay attorney’s fees of$5,000 to facilitate the stock redemptions. Is this feedeductible?
