Question

In: Accounting

Sandra and Renee each own 50% of the stock of Olive, an S corporation. They acquired...

Sandra and Renee each own 50% of the stock of Olive, an S corporation. They acquired their stock four years ago when Olive was formed. They have decided to dispose of their ownership interests in the corporation, and a substantial gain will result. Sandra thinks they should sell their stock, whereas Renee thinks they should first liquidate the corporation and then sell the assets.

Select either "Yes" or "No" to identify the consequences of each approach.

a. The classification of the sale is impacted depending on the type of sale.
b. If Olive sells the assets, the gain is taxed to Olive as a long-term capital gain.
c. Whether selling Olive stock or liquidating, Sandra and Renee will recognize the same amount of gain.
d. The stock sale is more complex and costly to carry out than an a liquidation.

Solutions

Expert Solution

a. Yes. The classification of sale is impacted depending on the type of sale they want to choose.

b. In the process of liquidation, the liquidator distributes the assets and liabilities of the corporation. If the income gained in the corporation is distributed to the shareholders, it is deemed as dividend distribution by the company out of the profits of it.

Capital gain attracts on cancellation of the shares in the process of liquidation, where the cancellation of the stock exceeds the cost of the shares.

c. No. Not necessarily the same,

Selling the stock in my opinion will result in more gain compared to the liquidation.

d. No. Stock sale is easiest compared to liquidation, because liquidation involves various arrangements e.g., sale of assets, their rights, liquidator remunerations etc.. Sellers always choose an option to sell their shares rather than assets sale which is very complex.


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