Question

Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet:

   Adjusted

FMV    Basis Appreciation

Cash $ 155,000    $ 155,000

Building 31,000    15,500    15,500

Land 124,000 62,000 62,000

Total $ 310,000 $ 232,500 $ 77,500

Under the terms of the agreement, Shauna will receive the $155,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $38,750. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $77,500. 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.    a. What amount of gain or loss does WFI recognize in the complete liquidation?    b. What amount of gain or loss does Shauna recognize in the complete liquidation?    c. What amount of gain or loss does Danielle recognize in the complete liquidation?    d. What is Danielle’s tax basis in the building and land after the complete liquidation? Building Land Adjusted basis

Answer 1

a. WFI has a taxable transaction and recognizes gain of $15500 on the transfer of building and gain of $62000 on the transfer of land.

b. Shauna recognizes gain of $116250 on the transfer of her stock to WFI ($155000 - $38750) in complete liquidation of WFI.

c. Danielle recognizes gain of $77500 on the transfer of her stock to WFI ($155000 - $77500) in complete liquidation of WFI.

d. Danielle's tax basis equals the fair market value of the assets she receives ($31000 building , $124000 land).