Question

White Corporation owns a rental building (its only asset) with a gross FMV of $1,000, subject to a nonrecourse mortgage of $400. White’s adjusted basis for this building is $300. Abby owns all of White’s stock, with a total basis of $100. White has $200 of E&P. White is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by White on $700 gain is $250 and on $600 gain is $200. For each of the following problems below, determine the amounts and character of realized and recognized gain or loss to all parties, the time of recognition, and the transferee’s basis in any property received in kind.

1. White sells the building, subject to the mortgage, to Mix Corporation in the current year for $600 in cash. White then liquidates, distributing to Abby all of the cash remaining after paying its taxes, in cancellation of Abby’s stock in the current year.
2. Mix Corporation pays $300 cash and gives a Mix Corporation $300 note payable in equal annual installments over five years. White’s plan of liquidation provides that White will stay in existence for five years for the sole purpose of collecting the note and paying the net amount over to Abby annually. Change problem because of sec 453 12 month rule for liquidations or add facts so students don’t go to this rule.
3. Mix Corporation pays $300 in cash and gives its $300 (face and FMV) note payable in equal annual installments plus interest over 5 years. In liquidation, White distributes the net cash and the note to Abby in the year of sale.
4. White adopts a plan of complete liquidation and distributes the property to Abby in kind pursuant to this plan. Abby then sells the property to Mix Corporation for $600 in cash, with Mix Corporation taking it subject to the $400 mortgage. Would it matter if Abby’s shares had varying prices per share? What if the property were subject to contingent environmental liabilities?

Answer 1

a. Amount realized : 600 ( To be recognize immediately)

Gain : 600( cash) + 400 ( mortgage paid ) - 300 (adjusted basis)

= 700

Tax on gain of 700 = 250 dollars

Cash remaining after tax = 700-250 = 450

Amount paid to abby : 450 ( amount remaining after paying tax )

Gain to abby : 350 (450-100)

Basis to Mix corporation : 1000

b

Amount realized : 600= 300+ 300( to be payable over a period of 5 years )

Recognition : 300 immediately and 300 over a period of 5 years

Gain : 600-300 = 300

Tax on 300 : 300*33.33% = 100

Basis to mix corporation : 600

Amount paid to abby: 200( 300-100) + 300 over a perood of 5 years

Gain to abby = 500-100 = 400

c

Amount realized : 600 =300 +300( note to be recognised over a period 5 years )

Cash will be paid to abby after tax will be 200 (300-100)+ 300 note payable

Interest will be recognized over period of 5 years by annoy limited

d . disclosure has to be made for contigent environmental liabilities