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.

                                                       FMV         Adjusted Basis          Appreciation

            Cash                          $ 200,000     $     200,000

            Building                           50,000               10,000                       40,000

            Land                               150,000               85,000                       65,000

            Total                           $  400,000     $     295,000              $    105,000

          Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna’s tax basis in her WFI stock is $45,000. 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 $105,000. 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 WFI recognize in the complete liquidation?

b)Same facts as the prior question: What amount of gain or loss does Shauna recognize in complete liquidation?

c) Same facts as the prior question, what amount of gain or loss does Danielle recognize in the complete liquidation?

Answer 1

a. $40000 ( $50000-$10000        ) would be considered as gain on transfeer of Building and $65000 ($150000-$85000)considered as gain on transfer of land b. Computation of Gain or Loss recognized by Shauna Amount Received by Shauna $2,00,000 Les:: Tax Basis in WFI Stock $45,000 Gain on transfer of Stock $1,55,000 c. Computation of Gain or Loss recognized by Shauna Amount Received by Daniellle (50000+150000) $2,00,000 Les:: Tax Basis in WFI Stock $1,05,000 Gain on transfer of Stock $95,000