Question

Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet:

	FMV			Adjusted Basis			Appreciation
Cash	$	155,000		$	155,000
Building		31,000			15,500			15,500
Land		124,000			62,000			62,000
Total	$	310,000		$	232,500		$	77,500

Under the terms of the agreement, Shauna will receive the $155,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $38,750. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $77,500. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation.

a. What amount of gain or loss does WFI recognize in the complete liquidation?

b. What amount of gain or loss does Shauna recognize in the complete liquidation?

c. What amount of gain or loss does Danielle recognize in the complete liquidation?

d. What is Danielle’s tax basis in the building and land after the complete liquidation?

Answer 1

(a) The gain on transaction of Building is $15,500 and of land is $62,000, so total gain is 77,500.

Explanation:

According to the scenario, the given data are as follows:

Cash Appreciation = $0

Building Appreciation = $15,500

Land Appreciation = $62,000

So, We can analyze the gain or loss for WFI after complete liquidation as follows:

So, on the transaction of the building, as building has an appreciation of $15,500, it will make a gain to WFI of $15,500.

Similarly, on the transaction of land, as land has an appreciation of $62,000, it will make a gain to WFI of $62,000.

So, total Gain = $15,500 + $62,000 = $77,500

(b) Shauna recognizes gain of $116,250 on the transfer of her stock to WFI ($155,000 - $38,750)(Cash-Shauna's tax basis) in complete liquidation of WFI.

(c) Danielle recognizes gain of $77,500 on the transfer of her stock to WFI ($155,000($124,000+$31,000) - $77,500 )(FMV of Land and Buliding-Danielle's tax basis) in complete liquidation of WFI.

(d) Danielle’s tax basis equals the fair market value of the assets she receives (building: $31,000, land: $124,000).