Question

Sleeping Corporation makes a liquidating distribution to its shareholder Ted. The liquidating distribution is land that it acquired in a §351 transfer two years ago. At the time of the contribution the land had basis of $100,000 and FMV of $500,000.    At the time of distribution the FMV of the land is $60,000. Ted owns 20% of the company, Stella owns 35%, Marcus owns $25%, and Brady owns 20%. Stella is Ted’s grandmother. Marcus and Brady are Ted’s best friends from childhood.  

1. What is the tax consequence to Sleeping Corporation on the distribution?
2. What is the tax consequence to Ted on the distribution if his stock basis is $300,000?

Answer 1

Solution

a)

Distribution of assets in kind by the organization to the investors or shareholders would bring about gain or loss to the business corporation . The gain or loss would be contrast between the fair market value (FMV)  and balanced basis of asset .In the said cases the loss would be ( $ 60,000 - $ 1,00,000) i.e $ 40,000 .

b)

At the point when the organization distribute assets for the investors during complete liquidation it would be treated as return of capital and thus capital increase or loss would be calculated.Capital gain or loss would be equivalent to the contrast between FMV of the property being dispersed and investors basis in stock or Ted stock basis. In the present case ($ 60,000 - $ 3,00,000) i.e is $ 2,40,000 would be capital decrease or capital loss .