Question

Bluebird Corporation owns and operates busses and has decided to liquidate its operations. Victor, who owns 80% of the company's stock, will receive all of the busses, repair parts inventory, and all tools and equipment. He plans to start a bus company in another town. Penny, who owns 20% of the stock, wants nothing to do with the new bus business and will receive a cash distribution. Bluebird will incur about $20,000 of expenses in connection with the liquidation. What tax issues should Victor, Penny, and Bluebird consider with respect to the liquidation? Penny and Victor should consider the following tax issues: • What gains or losses does Bluebird recognize on the two distributions? • Does Bluebird have to file a corporate tax return for the portion of the final tax year that it is in existence? If so, what income and expenses are included in the return? • Can Bluebird deduct the liquidation expenses on its final tax return? • What are the amounts and characters of the gain or loss that Penny and Victor recognize upon surrendering their Bluebird stock? • What basis does Victor take for the noncash assets that he receives? • What happens to Bluebird's tax attributes?

Answer 1

Bluebird Corporation will need to recognize any gain realized on the distribution of the Bluebird cars, support vehicles, repair parts inventory, tools, and equipment.

Bluebird recognizes no loss on the disposition of these items because they are distributed to a related party Penny recognizes no gain on the distribution because she receives only cash. Victor and Penny will need to determine their realized and recognized gains on the liquidation. Bluebird Corporation can deduct the liquidation expenses in its final tax return.

Any NOLs incurred in the final year can be carried back to the two preceding tax years. A substantial cost may be incurred in liquidating the corporation.

Perhaps Victor should consider buying Penny's stock and keep operating Bluebird Corporation in the new city.