Question

Blue Corp. is owned by two unrelated individuals, Alan and Sandy. Alan owns 80% of Blue Corp and Sandy owns 20%. Assume Blue Corp. has two assets both of which were purchased 7 years ago, equipment, adjusted basis $150,000, fair market value, $200,000, and a building, fair market value, $800,000, adjusted basis $900,000. In a complete liquidation the building is distributed to Alan and the equipment to Sandy. What are the tax consequences to Blue Corporation of the complete liquidation? Assume Alan’s basis in his shares in Blue Corporation was $100,000. What are the tax consequences to Alan of the complete liquidation?

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Answer 1

Blue corporation has two assets :
Asset	Adjusted Bases	Fair market value	Gain/(loss)
Equipment	150,000	200,000	50,000
Building	900,000	800,000	-100,000
		Total Gain/(loss)	-50,000
As Blue corporation is making a loss at liquidation as per the fair market value of its assets there will be no tax due for Blue Corporation
Alan's Basis in the shares = 100,000
Fair Market Value of the building received = 800,000
Alans will be charged capital gain tax on the difference between his basis for shares and the FMV of the asset received
Capital gain = 800000 - 700000 = 100,000
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