Question

Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

	Adjusted basis		FMV		Appreciation
Cash	$100,000		$100,000
Building	150,000		200,000		50,000
Land	50,000		120,000		70,000
Total	$300,000		$420,000		$120,000

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

Answer 1

Gary recognizes gain of $70,000 on the transfer of his stock to Amelia ($100,000 - $30,000) in liquidation of Amelia. Distributions in complete liquidation to individual shareholders are taxable to the shareholders.

Laura recognizes gain of $260,000 on the transfer of her stock to Amelia ($320,000 - $60,000) complete liquidation of Amelia. Her basis in the building is $200,000 and her basis in the land $120,000. Distributions in complete liquidation to individual shareholders are taxable to the shareholders noncash property received takes a basis equal to fair market value.