Reference no: EM132713575
Question - Brekkie Time! Inc. is a closely held US C Corporation that has been growing in popularity since it opened in 2010. It is a restaurant chain that specializes in Australian-style breakfast and lunch, with specialities such as meat pies and lamingtons (yum!). In 2020 their sales have been greatly reduced due to COVID-19. As a result they decide to sell all their restaurants that don't have outdoor seating (which account for about 30% of their business). They continue to operate the other restaurants where patrons can eat outside.
As a result of this business contraction, Brekkie Time! redeems issued stock at $1,000 per share, as follows:
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Owners
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#Owned Before Redemption
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#Redeemed
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#Owned After the Redemption
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Bruce
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40
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10
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30
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Shane
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40
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10
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30
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Koala Corp (a U.S. C-Corporation)
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20
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5
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15
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Total Issued and Outstanding
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100
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25
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75
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Bruce is your client and his basis in the stock is $100 per share, which he acquired when the corporation was formed in 2010.
Koala Corp. is also your client and its basis in the stock is also $100 per share, and it acquired the stock when the corporation was formed in 2010.
Brekkie Time! Inc. has sufficient earnings and profits to cover any distributions that are treated as non-liquidating distributions under IRC §301.
Required -
a) What are the tax consequences to Bruce as a result of this transaction?
b) What are the tax consequences to Koala Corp as a result of this transaction?
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