Federal Income Taxation

Federal Income Taxation II Module 5
Name Course Instructor Date
Federal Income Taxation II Module 5
Liquidations - Common
1 Alice and Pete each own 50% of the stock of XYZ Corporation. XYZ has cash of $300,000; inventory with a FMV $1,800,000 (AB $1,400,000) and land with a FMV $2,000,000 (AB $2,100,000). XYZ adopts a formal plan of liquidation and immediately thereafter distributes its assets to Alice and Pete. Alice receives the Inventory and $250,000 of cash, while Pete receives the Land and $50,000 of cash. Alice's adjusted basis in her XYZ Corporation stock is equal to $2,120,000 and Pete’s adjusted basis in his stock is $1,630,000.
* What are the tax consequences of the liquidation to XYZ Corporation and Alice and Pete?
Fair Market Value (FMV) Adjusted Basis (AB)
Realized gain or loss =FMV- AB
Alice
Gain on inventory = $1,800,000 - $1,400,000 = $400,000.
Cash $250,000
Alice recognizes, Cash +FMV of inventory- basis = $250,000 +$1,800,000 -$2,120,000 ($70,000)
Pete
Loss on land $2,000,000 -$2,100,000 = ($100,000)
Cash $50,000
Pete recognizes, Cash +FMV of land – basis= $50,000 +$2,000,000 -$1,630,000
= $420, 000
XYZ Corporation will recognize $400,000 in gain and $100,000 in loss for a net gain of $ 100,000
Alice recognizes ($70,000)
Pete recognizes $420, 000
* How would your answer to (a), above, change if XYZ Corporation also had liabilities of $400,000?
If a shareholder either assumes liabilities, the amount realized is reduced by the amount of those liabilities and, in this case, $400,000.The fair market value used to calculate gain or loss may not be less than the amount of the liability. The liabilities of $400,000 are less than the fair market value and do not affect the calculation of realized gains or losses.
* How would your answer to (a), above, change if XYZ Corporation had a contingent and speculative liability equal to $350,000, which was paid equally by Alice and Pete two years after the corporation was liquidated?
Contingent or speculative liabilities are not considered for the purpose of reducing the amount realized.
2 On May 2, 2015, Barney formed ABC Corporation contributing $200,000 in exchange for 100 percent of its stock. The corporation uses the funds to purchase a parcel of land. By April 14, 2020, the land had appreciated in value to $1,550,000.
What are the tax consequences to ABC and Barney if the corporation sells the land and then liquidates?
If the corporation liquidates there is $1,350,000 land appreciation being the difference between $1,550,000 and $200,000 .The land had appreciated in value to $1,550,000.
ABC Corporation will recognize a gain of $1,350,000 as a result of the distribution. Barney will also recognize a gain of $1,350,000
3 On May 2, 2014, Barney formed ABC Corporation contributing $200,000 in exchange for 100 percent of its stock. The corporation uses the funds to purchase a parcel of land. By April 14, 2020, the land had appreciated in value to $1,550,000. On December 12, 2017, he contributed Property #1 valued at $700,000 to ABC, receiving back additional ABC stock. Barney and ABC agreed to reduce the basis of Barney’s stock in lieu of reducing ABC’s basis in Property #1. Barney had purchased Property #1 in 2014 for $1,750,000.
What are the tax consequences to ABC and Barney if, on April 14, 2020, the corporation sells the land for $1,550,000 and Property #1 for $325,000 and then liquidates?
Land $1,550,000-$200,000 =$1,350,000
Shareholder’s basis for property #1 is $1750, 000
Property #1 $325,000-$750,000 = ($ 375, 000)
ABC will recognize gain of =$1,350,000 on land and loss of $ 375, 000, and total gain of $ 975,000
Barney will recognize gain of $1,350,000 on land ($1,550,000-$200,000) and loss on property #1 of $1, 050,000 ($700,000- $ 1,750,000) for a to5al gain of $ 300,000
4 On May 30, 2014, Barney formed ABC Corporation contributing $200,000 in exchange for 100 percent of its stock. The corporation uses the funds to purchase a parcel of land. By April 14, 2020, the land had appreciated in value to $1,550,000. On November 19, 2018, he contributed Property #1 valued at $700,000 to ABC, receiving back additional ABC stock. Barney and ABC agreed to reduce the basis of Barney’s stock in lieu of reducing ABC’s basis in Property #1. Barney had purchased Property #1 in 2014 for $1,750,000.
What are the tax consequences to ABC and Barney if, on April 14, 2020, the corporation sells the land for $1,550,000 and Property #1 for $325,000 and then liquidates?
While Barney had purchased Property #1 in 2014 for $1,750,000, the value was $700,000 to when ABC received it on November 19, 2018. Thus, the basis is $700,000 and not $1,750,000,
Land $1,550,000-$200,000 =$1,350,000
Shareholder’s basis for property #1 is $1750, 000
Property #1 $325,000-$750,000 = ($ 375, 000)
While Barney had purchased Property #1 in 2014 for $1,750,000, the value was $700,000 to when ABC received it on November 19, 2018. Thus, the basis is $700,000 and not $1,75...