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			Tax Basis			Appreciation (Depreciation)
Cash	$	382,000		$	382,000
Building		76,000			15,750			60,250
Land		306,000			377,500			(71,500	)
Total	$	764,000		$	775,250		$	(11,250	)

Under the terms of the agreement, Tiffany will receive the $382,000 cash in exchange for her 50 percent interest in ROF. Tiffany's tax basis in her ROF stock is $65,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $145,500. 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. (Any answer representing a loss should be entered as a negative number.)

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

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 $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

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 $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

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

Answer 1

Before Anwering f,g ,h let us understand

• ROF recognises gain of $60,250 on the transfer of building and recognises a loss of $71,500 on transfer of land.although this distribution is non-pro rata , carlos is not a related person because he does not own more than 50% of ROF stock
• Tiffany will recognise a gain of $317,000 ($382,000-$65,000) on transfer of stock to ROF in case of liquidation
• Carlos Will Recognise a gain of $236,500($382,000-$145,500) in case of Complete liquidation

Now Lets Answer

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

In This case ROF recognises a gain of $60,250 on transfer of building but cannot recognise a loss of $71,500 on the transfer of Land.This distribution is non pro-rata and the recipient carlos is a related person as he now owns more than 50% of ROF stock

f)Tiffany will recognise a gain of $240,600($305,600-$65,000) on transfer of her stock to ROF

g)Carlos recognises a gain of $312,900($382,000+$76,400-$145,500)on transfer of his stock to ROF

h)Carlos receives a tax basis equal to fair market value of assets it recieves(Building:$76,000 Land:$306,000).If carlos late sells land for more than $306,000 but less than $382,000 , he will recognise neither gain or loss on the sale