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Chapter 19: Corporate Formation, Reorganization, and Liquidation

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Question;Discussion Questions1.(LO1)Discuss the difference between gain realization and gain recognition in a property transaction.2.(LO1)What information must a taxpayer gather to determine theamount realizedin a property transaction?3.(LO1)Distinguish between exclusion and deferral as it relates to a property transaction.4.(LO1)Discuss how a taxpayer?s tax basis in property received in a property transaction will be affected based on whether a property transaction results in gain exclusions or gain deferral.5.(LO1)What information must a taxpayer gather to determine thetax-adjusted basisof property exchanged in a property transaction?6.(LO2)Why does Congress allow tax deferral on the formation of a corporation?7.(LO2)List the key statutory requirements that must be met before a corporate formation is tax-deferred under ?351.8.(LO2)What is the definition ofcontrolfor purposes of ?351? Why does Congress require the shareholders to control a corporation to receive tax deferral?9.(LO2)What is asubstituted basisas it relates to stock received in exchange for property in a ?351 transaction? What is the purpose of attaching a substituted basis to stock received in a ?351 transaction?10.(LO2)True or False. The receipt of boot by a shareholder in a ?351 transaction causes the transaction to be fully taxable. Explain.11.(LO2)True or False. A corporation?s assumption of shareholder liabilities will always constitute boot in a ?351 transaction. Explain.12.(LO2)How does the tax treatment differ in cases where liabilities are assumed with a tax avoidance purpose versus where liabilities assumed exceed basis? When would this distinction cause a difference in the tax treatment of the transactions?13.(LO2)What is acarryover basisas it relates to property received by a corporation in a ?351 transaction? What is the purpose of attaching a carryover basis to property received in a ?351 transaction?14.(LO2)Under what circumstances does property received by a corporation in a ?351 transaction not receive a carryover basis? What is the reason for this rule?15.(LO2)How does a corporation depreciate an asset received in a ?351 transaction in which no gain or loss is recognized by the transferor of the property?16.(LO2)True or False. A shareholder receives the same tax consequences whether property is contributed to a corporation in a ?351 transaction or as a capital contribution. Explain.17.(LO2)Why might a corporation prefer to characterize an instrument as debt rather than equity for tax purposes? Are the holders of the instrument indifferent as to its characterization for tax purposes?18.(LO2)Under what conditions is it advantageous for a shareholder to hold ?1244 stock? Why did Congress bestow these tax benefits on holders of such stock?19.(LO3)Why does the acquiring corporation usually prefer to buy the target corporation?s assets directly in an acquisition?20.(LO3)Why do the shareholders of the target corporation usually prefer to sell the stock of the target corporation to the acquiring corporation?21.(LO3)What is the Congressional purpose for allowing tax deferral on transactions that meet the definition of a corporate reorganization?22.(LO3)Why do publicly traded corporations use a triangular form of Type A reorganization in acquiring other corporations?23.(LO3)What are the key differences in the tax law requirements that apply to forward versus reverse triangular mergers?24.(LO3)What are the key differences in the tax law requirements that apply to a Type A stock-for-assets acquisition versus a Type B stock-for-stock acquisition?25.(LO4)How does the form of a regular ?338 election compare and contrast to a ?338(h)(10) election?26.(LO4)What tax benefits does the buyer hope to obtain by making a ?338 or ?338(h)(10) election?27.(LO4)What is the difference between theinside tax basisand theoutside tax basisthat results from an acquisition? Why is the distinction important?28.(LO4)What is the presumption behind the continuity of ownership interest (COI) requirement in a tax-deferred acquisition? How do the target shareholders determine if COI is met in a Type A reorganization?29.(LO4)W Corporation will acquire all of the assets and liabilities of Z Corporation in a Type A merger, after which W Corporation will sell off all of its assets and liabilities and focus solely on Z Corporation?s business. True or False: The transaction will be taxable because W Corporation fails thecontinuity of business enterprise test.Explain.30.(LO4)Compare how a shareholder computes her tax basis in stock received from the acquiring corporation in a straight Type A merger versus a Type B merger.31.(LO5)True or False. All shareholders receive the same tax treatment in a complete liquidation of a corporation. Explain.32.(LO5)True or False. A corporation recognizes all gains and losses on liquidating distributions of property to noncorporate shareholders. Explain.33.(LO5)Under what circumstances does a corporate shareholder receive tax deferral in a complete liquidation?34.(LO5)Under what circumstances will a liquidating corporation be allowed to recognize loss in a non-pro rata distribution?35.(LO5)Compare and contrast the built-in loss duplication rule as it relates to ?351 with the built-in loss disallowance rule as it applies to a complete liquidation.Problems36.(LO2)Ramon incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation?s stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases:FMVTax-Adjusted BasisInventory$ 10,000$ 4,000Building50,00030,000Land100,00050,000Total$160,000$84,000The fair market value of the corporation?s stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ramon.What amount of gain or loss does Ramonrealizeon the transfer of the property to his corporation?What amount of gain or loss does Ramonrecognizeon the transfer of the property to his corporation?What is Ramon?s basis in the stock he receives in his corporation?37.(LO2)Carla incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation?s stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases:FMVTax-Adjusted BasisInventory$ 20,000$ 10,000Building150,000100,000Land250,000300,000Total$420,000$410,000The corporation also assumed a mortgage of $120,000 attached to the building and land. The fair market value of the corporation?s stock received in the exchange was $300,000.What amount of gain or loss does Carlarealizeon the transfer of the property to her corporation?What amount of gain or loss does Carlarecognizeon the transfer of the property to her corporation?What is Carla?s basis in the stock she receives in her corporation?Would you advise Carla to transfer the building and land to the corporation? What tax benefits might she and the corporation receive if she kept the building and land and leased it to the corporation?38.(LO2)Ivan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation?s stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases:FMVTax-Adjusted BasisInventory$ 10,000$15,000Building50,00040,000Land60,00030,000Total$120,000$85,000The fair market value of the corporation?s stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ivan. The transaction met the requirements to be tax-deferred under ?351.What amount of gain or loss does Ivanrealizeon the transfer of the property to his corporation?What amount of gain or loss does Ivanrecognizeon the transfer of the property to his corporation?What is Ivan?s basis in the stock he receives in his corporation?What is the corporation?s tax-adjusted basis in each of the assets received in the exchange?Would the stock held by Ivan qualify as ?1244 stock? Why would this fact be important if he sold his stock at a loss at some future date?39.(LO2)Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation?s stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases:FMVTax-Adjusted BasisInventory$ 20,000$ 10,000Building150,000100,000Land230,000300,000Total$400,000$410,000The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation?s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under ?351.What amount of gain or loss does Zhangrealizeon the transfer of the property to her corporation?What amount of gain or loss does Zhangrecognizeon the transfer of the property to her corporation?What is Zhang?s tax basis in the stock she receives in the exchange?What is the corporation?s tax-adjusted basis in each of the assets received in the exchange?Assume the corporation assumed a mortgage of $500,000 attached to the building and land.How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?What is Zhang?s tax basis in the stock she receives in the exchange?What is the corporation?s tax-adjusted basis in each of the assets received in the exchange?40.(LO2)Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Sam?s tax basis in the inventory is $60,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualified as organizational expenditures). The accounting services are valued at $25,000.What amount of income gain or loss does Samrealizeon the formation of the corporation? What amount, if any, does herecognize?What is Sam?s tax basis in the stock he receives in return for his contribution of property to the corporation?What amount of income gain or loss does Devonrealizeon the formation of the corporation? What amount, if any, does herecognize?What is Devon?s tax basis in the stock he receives in return for his contribution of services to the corporation?Assume Devon received 25 percent of the stock in the corporation in return for his services.What amount of income gain or loss does Samrecognizeon the formation of the corporation?What is Sam?s tax basis in the stock he receives in return for his contribution of property to the corporation?What amount of income gain or loss does Devonrecognizeon the formation of the corporation?What is Devon?s tax basis in the stock he receives in return for his contribution of services to the corporation?41.(LO2)What tax advice could you give Sam and Devon to change the tax consequences you identified that relate to Sam in problem 40e?42.(LO2)Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $200,000 in return for 50 percent of the corporation?s stock. Hermione contributed a building and land with the following fair market values and tax-adjusted bases in return for 50 percent of the corporation?s stock:FMVTax-Adjusted BasisBuilding$ 75,000$ 20,000Land175,00080,000Total$250,000$100,000To equalize the exchange, Wizard Corporation paid Hermione $50,000 in addition to her stock.What amount of gain or loss does Ronrealizeon the formation of the corporation? What amount, if any, does herecognize?What is Ron?s tax basis in the stock he receives in return for his contribution of property to the corporation?What amount of gain or loss does Hermionerealizeon the formation of the corporation? What amount, if any, does sherecognize?What is Hermione?s tax basis in the stock she receives in return for her contribution of property to the corporation?What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?Assume Hermione?s tax-adjusted basis in the land was $200,000.What amount of gain or loss does Hermionerealizeon the formation of the corporation? What amount, if any, does sherecognize?What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?Assume Hermione?s tax-adjusted basis in the land was $250,000.What amount of gain or loss does Hermionerealizeon the formation of the corporation? What amount, if any, does sherecognize?What tax-adjusted basis does Wizard Corporation take in the land and building received from Hermione?What election can Hermione and Wizard Corporation make to allow Wizard Corporation to take a carryover basis in the land?43.(LO2)On October 31, 2009, Jack O. Lantern incurred a $60,000 loss on the worthlessness of his stock in the Creepy Corporation (CC). The stock, which Jack purchased in 2005, met all of the ?1244 stock requirements at the time of issue. In December 2009, Jack?s wife Jill incurred a $75,000 loss on the sale of Eerie Corporation (EC) stock that she purchased in July 2005 and which also satisfied all of the ?1244 stock requirements at the time of issue. Both corporations are operating companies.How much of the losses incurred on the two stock sales can Jack and Jill deduct in 2009, assuming they do not have capital gains in the current or prior years?Assuming they did not engage in any other property transactions in 2009, how much of a net capital loss carryover to 2010 will Jack and Jill have?What would be the tax treatment for the losses if Jack and Jill reported only $60,000 of taxable income in 2009, excluding the securities transactions?What tax planning suggestions can you offer the Lanterns to increase the tax benefits of these losses?44.(LO2)Breslin Inc. made a capital contribution of investment property to its 100 percent owned subsidiary, Crisler Company. The investment property had a fair market value of $3,000,000 and a tax basis to Breslin of $2,225,000.What are the tax consequences to Breslin Inc. on the contribution of the investment property to Crisler Company?What is the tax basis of the investment property to Crisler Company after the contribution to capital?45.(LO3)On February 27, 2005, Federated Department Stores (Macy?s) acquired The May Department Stores Company (Marshall Fields) in a tax-deferred acquisition. The Form 8-K describing the transaction was issued on February 28, 2005. You can access the Form 8-K at the company?s Web site,www.federatedfds.comand accessing the company?s SEC filings from its Investor Web site. Read ?Item 1.01, Entry into a Material Definitive Agreement? and determine which form of merger was used to bring about the acquisition.46.(LO3)On January 28, 2005, the Procter & Gamble Company acquired The Gillette Company in a tax-deferred acquisition. The Form 8-K describing the transaction was issued on January 28, 2005. You can access the Form 8-K at the company?s Web site,www.pg.comand accessing the company?s SEC filings. Read ?Item 1.01, Entry into a Material Definitive Agreement? and determine which form of merger was used to effect the acquisition.47.(LO4)Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company?s tax accounting balance sheet. The relevant information is summarized as follows:FMVTax-Adjusted BasisAppreciationCash$ 10,000$ 10,000Receivables15,00015,000Building100,00050,000$ 50,000Land225,00075,000150,000Total$350,000$150,000$200,000Payables$ 18,000$ 18,000Mortgage*112,000112,000Total$130,000$130,000*The mortgage is attached to the building and land.Ernesto was asking for $400,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($80,000) will be recorded as goodwill.What amount of gain or loss does BLI recognize if the transaction is structured as a direct asset sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?What amount of gain or loss does Ernesto recognize if the transaction is structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax proceeds (computed in question a) to Ernesto in liquidation of his stock?What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a direct asset purchase?48.(LO4)Using the same facts inproblem 47, assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian?What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?49.(LO4)Rather than purchase BLI directly (as inproblems 47and48), Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $200,000 plus voting stock in STS worth $200,000. Ernesto will become a 10 percent shareholder in STS after the transaction.Will the continuity of ownership interest (COI) requirements for a straight Type A merger be met? Explain.What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger?What is Ernesto?s tax basis in the STS stock he receives in the exchange?What are the tax bases of the BLI assets held by STS after the merger?50.(LO4)Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU Inc., in a tax-deferred triangular Type A merger using an acquisition subsidiary of WU. The sole shareholder of EMU, Edie Eagle, will receive $225,000 plus $150,000 of WU voting stock in the transaction.Can the transaction be structured as a forward triangular Type A merger? Explain why or why not.Can the transaction be structured as a reverse triangular Type A merger? Explain why or why not.51.(LO4)Robert and Sylvia propose to have their corporation, Wolverine Universal (WU), acquire another corporation, EMU Inc., in a stock-for-stock Type B acquisition. The sole shareholder of EMU, Edie Eagle, will receive $400,000 of WU voting stock in the transaction. Edie?s tax basis in her EMU stock is $100,000.What amount of gain or loss does Edie recognize if the transaction is structured as a stock-for-stock Type B acquisition?What is Edie?s tax basis in the WU stock she receives in the exchange?What is the tax basis of the EMU stock held by WU after the exchange?52.(LO5)Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet:FMVTax-Adjusted BasisAppreciationCash$200,000$200,000Building50,00010,000$ 40,000Land150,00090,00060,000Total$400,000$300,000$100,000Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna?s tax basis in her WFI stock is $50,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle?s tax basis in her WFI stock is $100,000.What amount of gain or loss does WFI recognize in the complete liquidation?What amount of gain or loss does Shauna recognize in the complete liquidation?What amount of gain or loss does Danielle recognize in the complete liquidation?What is Danielle?s tax basis in the building and land after the complete liquidation?53.(LO5)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:FMVTax-Adjusted BasisAppreciation (Depreciation)Cash$200,000$200,000Building50,00010,000$ 40,000Land150,000200,000(50,000)Total$400,000$410,000$(10,000)Under the terms of the agreement, Tiffany will receive the $200,000 cash in exchange for her 50 percent interest in ROF. Tiffany?s tax basis in her ROF stock is $50,000. Carlos will receive the building and land in exchange for his 50 percent interest in ROF. His tax basis in the ROF stock is $100,000.What amount of gain or loss does ROF recognize in the complete liquidation?What amount of gain or loss does Tiffany recognize in the complete liquidation?What amount of gain or loss does Carlos recognize in the complete liquidation?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 $160,000 in the liquidation and Carlos will receive the land and building plus $40,000.What amount of gain or loss does ROF recognize in the complete liquidation?What amount of gain or loss does Tiffany recognize in the complete liquidation?What amount of gain or loss does Carlos recognize in the complete liquidation?What is Carlos?s tax basis in the building and land after the complete liquidation?54.(LO5)Jefferson Millinery Inc. (JMI) decided to liquidate its wholly owned subsidiary, 8 Miles High Inc. (8MH). 8MH had the following tax accounting balance sheet:FMVTax-Adjusted BasisAppreciationCash$200,000$200,000Building50,00010,000$ 40,000Land150,00090,00060,000Total$400,000$300,000$100,000What amount of gain or loss does 8MH recognize in the complete liquidation?What amount of gain or loss does JMI recognize in the complete liquidation?What is JMI?s tax basis in the building and land after the complete liquidation?55.(LO5)Jefferson Millinery Inc. (JMI) decided to liquidate its wholly owned subsidiary, 8 Miles High Inc. (8MH). 8MH had the following tax accounting balance sheet:FMVTax-Adjusted BasisAppreciationCash$200,000$200,000Building50,00010,000$ 40,000Land150,000200,000(50,000)Total$400,000$410,000$(10,000)What amount of gain or loss does 8MH recognize in the complete liquidation?What amount of gain or loss does JMI recognize in the complete liquidation?What is JMI?s tax basis in the building and land after the complete liquidation?Comprehensive Problems56.Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, ?The Human Vacuum Cleaner.? Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company?s common stock. The corporation would also assume the company?s liabilities (payables and mortgage).Balance SheetTax BasisFMVAssetsAccounts receivable$ 0$ 5,000Cleaning equipment (net)25,00020,000Building50,00075,000Land25,00050,000Total assets$100,000$150,000LiabilitiesAccounts payable$ 0$ 10,000Salaries payable05,000Mortgage on land and building35,00035,000Total liabilities$ 35,000$ 50,000How much gain or loss does Brooks realize on the transfer of each asset to the corporation?How much, if any, gain or loss does he recognize (on a per asset basis)?How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation?s stock?What basis does Brooks have in the corporation?s stock?What is the corporation?s tax basis in each asset it receives from Brooks?How would you answer question b if Brooks had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption?Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected?Brooks was depreciating the equipment (200 percent declining balance) and building (straight-line) using MACRS when it was held inside the proprietorship. How will the corporation depreciate the equipment and building? Assume Brooks owned the equipment for four years (seven-year property) and the building for six years.Will the corporation be able to deduct the liabilities when paid? Will it matter which accounting method (cash or accrual) the corporation uses?Would you advise Brooks to transfer the land and building to the corporation? What other tax strategy might you suggest to Brooks with respect to the realty?57.Your client, Midwest Products Inc. (MPI), is a closely held, calendar-year, accrual-method corporation located in Fowlerville, Michigan. MPI has two operating divisions. One division manufactures lawn and garden furniture and decorative objects (furniture division), while the other division manufactures garden tools and hardware (tool division). MPI?s single class of voting common stock is owned as follows:SharesTax BasisFMVIris Green300$2,000,000$3,000,000Rose Ruby1001,200,0001,000,000Lily White100800,0001,000,000Totals500$4,000,000$5,000,000The three shareholders are unrelated.Outdoor Living Company (OLC), a publicly held, calendar-year corporation doing business in several midwestern states, has approached MPI about acquiring its furniture division. OLC has no interest in acquiring the tool division, however. OLC?s management has several strong business reasons for the acquisition, the most important of which is to expand the company?s market into Michigan. Iris, Rose, and Lily are amenable to the acquisition provided it can be accomplished in a tax-deferred manner.OLC has proposed the following transaction for acquiring MPI?s furniture division. On April 30, 2009, OLC will create a 100 percent owned subsidiary, OLC Acquisition Inc (OLC-A). OLC will transfer to the subsidiary 60,000 shares of OLC voting common stock and $2,000,000. The current fair market value of the OLC voting stock is $50 per share ($3,000,000 in total). Each of the three MPI shareholders will receive a pro rata amount of OLC stock and cash.As part of the agreement, MPI will sell the tool division before the acquisition, after which MPI will merge into OLC-A under Michigan and Ohio state laws (a forward triangular Type A merger). Pursuant to the merger agreement, OLC-A will acquire all of MPI?s assets, including 100 percent of the cash received from the sale of the tool division ($2,000,000), and will assume all of MPI?s liabilities. The cash from the sale of the tool division will be used to modernize and upgrade much of the furniture division?s production facilities. OLC?s management is convinced that the cash infusion, coupled with new management, will make MPI?s furniture business profitable. OLC management has no plans to liquidate OLC-A into OLC at any time subsequent to the merger. After the merger, OLC-A will be renamed Michigan Garden Furniture Inc.Determine whether the proposed transaction meets the requirements to qualify as a tax-deferred forward triangular Type A merger. Consult Rev. Rul. 88-48 and Rev. Rul. 2001-25 in thinking about the premerger sale of the tool division assets.Could the proposed transaction qualify as a reverse triangular Type A merger if OLC-A merged into MPI? If not, how would the transaction have to be restructured to meet the requirements to be a reverse triangular merger?58.Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you will find a way for them to liquidate the corporation without incurring any corporate-level tax liability.The DCC?s tax accounting balance sheet at the date of liquidation is as follows:Tax BasisFMVAssetsCash$ 30,000$ 30,000Accounts receivable10,00010,000Inventory10,00020,000Equipment30,00020,000Building15,00030,000Land5,00040,000Total assets$100,000$150,000LiabilitiesAccounts payable$ 5,000Mortgage payable?Building10,000Mortgage payable?Land10,000Total liabilities$ 25,000Shareholders? EquityCommon stock?Rex (80%)$ 60,000$100,000Common stock?Felix (20%)30,00025,000Total shareholders? equity$ 90,000$125,000Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming each shareholder receives a pro rata distribution of the corporation?s assets and assumes a pro rata amount of the liabilities.Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming Felix receives $25,000 in cash and Rex receives the remainder of the assets and assumes all of the liabilities.Assume Felix received the accounts receivable and equipment and assumed the accounts payable.Will Felix recognize any income when he collects the accounts receivable?Will Felix be able to take a deduction when he pays the accounts payable?Assume Rex is a corporate shareholder of DCC.Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming each shareholder receives a pro rata distribution of the corporation?s assets and assumes a pro rata amount of the liabilities.Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming Felix receives $25,000 in cash and Rex receives the remainder of the assets and assumes all of the liabilities.Assume the equipment was contributed by Rex to DCC in a ?351 transaction two months prior to the liquidation. At the time of the contribution, the property?s fair market value was $25,000.Would the tax result change if the property was contributed one year ago? Two years ago? Three years ago?

 

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