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ACCT 421 Lecture 12: ACCT 421 Chapter 13 Lecture

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School
Old Dominion University
Department
Accounting
Course
ACCT 421
Professor
Vivian Paige

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Document Summary

General rule: transaction is treated as taxable sale or exchange of the shareholder"s propert(cid:455) to the (cid:272)orporatio(cid:374) Tax consequences: boot received: recognized gain equals lesser of: Fmv of boot: allocate stock and boot pro rata when multiple assets transferred using relative fmv of assets. Character of recognized gain is determined by the type of property transferred: basis of boot is fmv. Liabilities: general rules: not treated as boot received, exceptions: tax avoidance transactions all liabilities will be considered boot if: Any liabilities are assumed with purpose of avoiding federal income tax; or. No corporate business purpose for assuming the liabilities: exception: liabilities in excess of basis. Basis of stock received in a 351 exchange. O(cid:374) the (cid:272)orporatio(cid:374)"s (cid:271)ooks: basis of property received carryover basis. Limited to fmv: holding period if capital or 1231 carries over, tax basis increased by gain recognized by shareholder. Adjust for book-tax differences: favorable or unfavorable, permanent or temporary.

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Related Questions

Zhang incorporated her sole proprietorship by transferringinventory, a building, and land to the corporation in return for100 percent of the corporation’s stock. The property transferred tothe corporation had the following fair market values and taxbases:

FMV Tax Basis

Inventory $ 20,000 $ 10,000

Building 150,000 100,000

Land 230,000 70,000

Total $ 400,000 $ 180,000

The corporation also assumed a mortgage of $200,000 attached tothe building and land. The fair market value of the corporation’sstock received in the exchange was $220,000. The exchange met therequirements to be tax-deferred under §351.

. What amount of gain does Zhangrecognize on the transfer of the property to hercorporation?

Jack and Jill Uphill are the shareholders of JJ Art, Inc., an S corporation which conducts business as an art gallery in Miami Beach, FL. The corporation was formed in 1986, and the corporation has always been an S corporation. JJ Art, Inc. also owns the real estate used in the business. Jill inherited the land from her grandfather upon his death in 1985, and she transferred the property to the corporation solely in exchange for stock of the corporation in a nonrecognition transaction to which Code Section 351 applied. Her grandfather had purchased the real estate for $10,000 many years earlier. The fair market value of the property as finally determined for federal estate tax purposes upon her grandfather’s death was $300,000. The real property was then unencumbered and remains so today. The real estate consists of the land and a free standing building with a total fair market value of $4,000,000. The corporation’s total basis in the real estate (land and building) on the date of distribution is $20,000. On January 20, 2017, JJ Art, Inc. adopted a plan of complete liquidation, and on February 20, JJ Art., Inc. distributed the real estate pro rata to its two shareholders. How much gain or loss, if any, was realized and recognized by the corporation as a result of the distribution of the real estate to Jack and Jill?

a.0, because this is an S corporation.

b. $280,000.

c. $3,980,000.

d. 0, because this is a distribution to the individual shareholders in liquidation of the corporation.

My answer is (b) 280,000. Am I on the right track? If not can you tell me what answer you derived at and how.

Rex and Felix are the sole shareholders of the Dogs and CatsCorporation (DCC). After several years of operations using theaccrual method, they decided to liquidate the corporation andoperate the business as a partnership. Rex and Felix hired a lawyerto draw up the legal papers to dissolve the corporation, but theyneed some tax advice from you, their trusted accountant. They arehoping you will find a way for them to liquidate the corporationwhile minimizing their total income tax liability.

Rex has a tax basis in his shares of $72,000 and Felix has a taxbasis in his shares of $36,000. The DCC’s tax accounting balancesheet at the date of liquidation is as follows: (Negativeamounts should be indicated by a minus sign. Leave no answer blank.Enter zero if applicable.) Corporate tax rate

Adjusted Basis FMV
Assets
Cash $ 34,000 $ 34,000
Accounts receivable 11,000 11,000
Inventory 11,000 22,000
Equipment 34,000 22,000
Building 17,000 34,000
Land 13,000 50,000
Total assets $ 120,000 $ 173,000
Liabilities
Accounts payable $ 5,000
Mortgage payable—Building 7,500
Mortgage payable—Land 7,500
Total liabilities $ 20,000
Shareholders’Equity
Common stock—Rex (80%) $ 72,000 $ 118,000
Common stock—Felix (20%) 36,000 35,000
Total shareholders equity $ 108,000 $ 153,000


Required:

A. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporation’s assets and assumes a pro rata amount of theliabilities.

B. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $35,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.

For parts c and d: Assume Felix received the accounts receivableand equipment and assumed the accounts payable.

C. Will Felix recognize any income when hecollects the accounts receivable?

D. Will Felix be able to take a deduction whenhe pays the accounts payable?

For parts e and f: Assume Rex is a corporate shareholder ofDCC.

E. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporation’s assets and assumes a pro rata amount of theliabilities.

F. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $36,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.