Expert Corporation adopts a plan of liquidation. It distributes an apartment bui

Question

Expert Corporation adopts a plan of liquidation. It distributes an apartment building having a $12 million FMV and a $10.3 million adjusted basis, and land having a $8 million FMV and a $6,900,000 adjusted basis, to DEF Partnership in exchange for all the outstanding Expert stock. DEF Partnership has an $1,000,000 basis in its Expert stock. Expert has claimed $900,000 of MACRS depreciation on the building. DEF Partnership agrees to assume the $18 million mortgage on the land and building. All of Expert's assets other than the building and land are used to pay its federal income tax liability.

a) What are the amount and character of Expert's recognized gain or loss on the distribution?

b) What are the amount and character of DEF Partnership's gain or loss on the liquidation? What is its basis for the land and building?

c) How would your answer to Parts a and b change if the mortgage instead was $20.5 million?

Explanation / Answer

A)

The character of gain or loss recognized by the S shareholder depends on whether the stock is a capital asset in the shareholder’s hands and whether the transaction constitutes a complete or a partial liquidation of the corporation. Long-term or short-term classification of a liquidation that qualifies for capital gain treatment depends on the shareholder’s holding period, with long-term status having significant importance due to the 15% tax rate cap on long-term capital gains.

Realized Gain= Fair Market Value- Adjusted Basis.

Building=12 million- .9 - 10.3 million= .8 million

Land=8 million- 6.9= 1.1 million

(B)

Fair Market Value =12 million+8 million=20 million.

20 million * 10 million / 18 million=11.11 million

(C) 20 million * 10 million/20.5 million= 9.75 million.

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