Question

Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF). After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet:

	FMV			Adjusted Basis			Appreciation (Depreciation)
Cash	$	200,000		$	200,000
Building		50,000			10,000			40,000
Land		150,000			200,000			(50,000	)
Total	$	400,000		$	410,000		$	(10,000	)

Under the terms of the agreement, Tiffany will receive the $200,000 cash in exchange for her 50 percent interest in ROF. Tiffany's tax basis in her ROF stock is $50,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $100,000. 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. (Negative amounts should be indicated by a minus sign.)

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

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

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

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

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

e. What amount of gain or loss does ROF recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

f. What amount of gain or loss does Tiffany recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

g. What amount of gain or loss does Carlos recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.

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

Answer 1

Solution :

Part A : Gain or Loss to be recognized in Complete Liquidation :

Building = $50,000 - $10,000 = $40,000 Gain

Land = $150,000 - $200,000 = ($50,000) Loss

Part B : Gain or Loss recognized by Tiffany :

Amount received by Tiffany - Tiffany's tax basis

= $200,000 - $50,000

= $150,000 to be recognized as gain by Tiffany on the stock transfer.

Part C : Gain or Loss recognized by Carlos :

Fair market value of the Assets received - Carlo's Tax basis

= $50,000 + $150,000 - $100,000

= $200,000 - $100,000

= $100,000 to be recognized as gain by Carlos on the stock transfer.

Part D : Carlos’s tax basis in the building and land after the complete liquidation :

The fair market value of the land and building received will be the tax basis of Carlos after the complete liquidation.

= $50,000 + $150,000

= $200,000

Part E : Gain or Loss to be recognized in Complete Liquidation when Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent of ROF stock

Building = $50,000 - $10,000 = $40,000 Gain TO BE RECOGNIZED

Land = $150,000 - $200,000 = ($50,000) Loss CANNOT BE RECOGNIZED

The loss cannot be recognized as the distribution is received by a related person (Carlos owns >50% of the stock) and the is done on a non pro rata basis.

Part F : Gain or Loss recognized by Tiffany when Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent of ROF stock :

Amount received by Tiffany - Tiffany's tax basis

= $160,000 - $50,000

=$110,000 to be recognized as gain by Tiffany

Part G : Gain or Loss recognized by Carlos when Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent of ROF stock :

Fair market value of the Assets received + Cash received - Carlo's Tax basis

= $50,000 + $150,000 + $40,000 - $100,000

= $240,000 - $100,000

= $140,000 to be recognized as gain by Carlos

Part H : Carlos’s tax basis in the building and land after the complete liquidation :

The fair market value of the land and building received will be the tax basis of Carlos after the complete liquidation.

= $50,000 + $150,000

= $200,000

Note : If you have any queries relating to this answer, do reach us out at the comment section below. Your valuable feedback is important to us