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) Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $327,800 in the liquidation and Carlos will receive the land and building plus $81,950. What amount of gain or loss does Tiffany recognize in the complete liquidation?

B) Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $327,800 in the liquidation and Carlos will receive the land and building plus $81,950.What amount of gain or loss does Carlos recognize in the complete liquidation?

C) Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $327,800 in the liquidation and Carlos will receive the land and building plus $81,950.What is Carlos’s tax basis in the building and land after the complete liquidation?

Answer 1

A) Gain or Loss of Tiffany

A gain of $264300 ($327800-$63500) on the stock transfer of ROF would be recognized by Tiffany.

B) Gain or Loss of Carlos

A gain of $ 355700 ($491700- $136000) on the stock transfer of ROF would be recognised by Carlos.

C) Tax Basis

An amount equal to the fair market values of the transferred assets would be the tax basis of Carlos.

Building	$73250
Land	$336500

If the land is sold at a price between $336500 and $397500 then no gain or loss would be recognized.