Question

Cartman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Cartman decided to liquidate SP Corporation by distributing the assets to Cartman and Kenny. The tax basis of Cartman's shares is $13,000 and $8,000 for Kenny's shares. SP reported the following balance sheet at the date of liquidation:

Cash $18,000 $18,000

Accounts receivable 16,000 16,000

Stock investment 15,000 75,000

Land 36,000 21,000

Total assets $85,000 $130,000

Common stock—Cartman (90%) $13,000 $117,000

Common stock—Kenny (10%) 8,000 13,000

Total shareholder equity $21,000 $130,000

Compute the gain or loss recognized by SP, Cartman, and Kenny on a complete liquidation of the corporation, where SP distributes $13,000 of cash to Kenny and the remaining assets to Cartman.

Compute the gain or loss recognized by SP and Kenny on a complete liquidation of the corporation, where SP distributes the stock investment to Kenny and the remaining assets to Cartman. Assume that SP’s tax rate is zero.

What form needs to be filed with the liquidation of SP?

part A part B

Gain or loss recognized by SP

Gain or Loss recognized by Cartman

Gain or Loss Recognized by Kenny

Answer 1

a.Compute the gain or loss recognized by SP, Cartman, and Kenny on a complete liquidation of thecorporation, where SP distributes $13,000 of cash to Kenny and the remaining assets to Cartman.

SP recognizes no gain or loss under 337 to the extent that the transaction qualifies as the liquidation of a controlled subsidiary under 332

• However, the distribution to Kenny would trigger gain recognitionunder 336 (but not loss – 336d3)
• However, there is zero gain realized on the distribution of cash to Kenny

Cartman would recognize no gain or loss because the transaction qualifies as the liquidation of a controlled subsidiary under 332

• Cartman takes a carryover basis in the assets under 334

Kenny recognizes a $5,000 gain under 331 (13,000 cash received – 8,000 stock basis)

b.Compute the gain or loss recognized by SP and Kenny on a complete liquidation of the corporation, where SP distributes the stock investment to Kenny and the remaining assets to Cartman. Assume thatSP’s tax rate is zero.

- SP recognizes a gain of $60,000 under 336 as is stock investment was sold at its FMV (75k-15k)

• No gain is recognized on the asset it distributes to Cartman

- Cartman would recognize no gain or loss bcs the transaction qualifies as the liquidation of a controlled subsidiary under 332

• Cartman takes a carryover basis in the assets under 334

- Kenny recognizes a $68,000 gain on the distribution under 331 ($75,000 FMV of stock investment received –$8,000 basis in SP stock) and has a $13,000 basis in the stock investment

c. What form needs to be filed with the liquidation of SP?

Form 966 needs to be filed within 30 days of the plan of liquidation adoption