Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal O

Question

Tiffany and Carlos decided to liquidate their jointly owned corporation, Royal Oak Furniture (ROF). After liquidating its remaining inventory and paying off its remaining liabilities, ROF had the following tax accounting balance sheet:

Under the terms of the agreement, Tiffany will receive the $382,000 cash in exchange for her 50 percent interest in ROF. Tiffany's tax basis in her ROF stock is $65,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $145,500. 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. (Any answer representing a loss should be entered as a negative number.)

a. What amount of gain or loss does ROF recognize in the complete liquidation?

b. What amount of gain or loss does Tiffany recognize in the complete liquidation?

c. What amount of gain or loss does Carlos recognize in the complete liquidation?

d. What is Carlos’s tax basis of the building and land after the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

e. What amount of gain or loss does ROF recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

f. What amount of gain or loss does Tiffany recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

g. What amount of gain or loss does Carlos recognize in the complete liquidation?

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

h. What is Carlos’s tax basis in the building and land after the complete liquidation?

FMV Tax Basis Appreciation
(Depreciation) Cash $ 382,000 $ 382,000 Building 76,000 15,750 60,250 Land 306,000 377,500 (71,500 ) Total $ 764,000 $ 775,250 $ (11,250 )

Explanation / Answer

A:- ROF recognizes gain of $60,250 on the transfer of the building and recognizes a $71,500 loss on the transfer of the land. Although this distribution is non-pro rata, Carlos is not a related person because he does not own more than 50 percent of ROFstock.

B:- Tiffany recognizes gain of $317,000 on the transfer of her stock to ROF ($382,000 - $65,000).

C:- Carlos recognizes gain of $236,500 on the transfer of his stock to ROF ($382,000 - $145,500).

D:- Carlos receives a tax basis equal to the fair market value of the assets he receives (building: $76,000, land: $306,000).

Assume Tiffany owns 40 percent of the ROF stock and Carlos owns 60 percent. Tiffany will receive $305,600 in the liquidation and Carlos will receive the land and building plus $76,400.

E:- ROF recognizes gain of $60,250 on the transfer of the building, but cannot recognize loss of $71,500 on the transfer of the land. This distribution is non-pro rata and the recipient, Carlos, is a related person because he owns more than 50 percent of ROF stock.

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