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	$	409,750		$	409,750
Building		73,250			24,000			49,250
Land		336,500			397,500			(61,000)
Total	$	819,500		$	831,250		$	(11,750)

Under the terms of the agreement, Tiffany will receive the $409,750 cash in exchange for her 50 percent interest in ROF. Tiffany's tax basis in her ROF stock is $63,500. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $136,000. 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.

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?

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

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

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

Answer 1

Solution :

a. Gain or Loss recognised by ROF in complete liquidation is -

Gain on the transfer of building = $49250

Loss on transfer of land = $61000

Although this distribution is non pro rata, Carlos is unrelated person as he does not own more than 50% of ROF stock.

b. Gain or Loss recognised by Tiffany in complete liquidation is -

Tiffany recognises a gain of $ 346250

=> 409750 - 63500

=> 346250

c. Gain or Loss recognised by Carlos in complete liquidation is -

Carlos recognises a gain of $ 273750

=> 409750 - 136000

=> 273750

d. Carlos’s tax basis in building and land after the complete liquidation -

An amount equal to the fair market value of the assets would be tax basis for Carlos i.e.

Building - $ 73250

Land - $ 336500