Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years ofoperations using the accrual method, they decided to liquidate the corporation and operate thebusiness as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve thecorporation, but they need some tax advice from you, their trusted accountant. They are hoping youwill find a way for them to liquidate the corporation while minimizing their total income tax liability.
Rex has a tax basis in his shares of $110,000 and Felix has a tax basis in his shares of $80,000.DCC’s tax accounting balance sheet at the date of liquidation is as follows:
AdjustedBasis FMV
Assets
Cash $64,000 $64,000
Accounts receivable 44,000 44,000
Inventory 44,000 54,000
Equipment 64,000 54,000
Building 49,000 64,000
Land 39,000 74,000
Total assets $304,000 $354,000
Liabilities
Accounts payable $39,000
Mortgage payable—Building 44,000
Mortgage payable—Land 44,000
Total liabilities $127,000
Shareholders’ Equity
Common stock—Rex (80%) $181,600
Common stock—Felix (20%) 45,400
Total shareholders equity $227,000
Required:
a.
Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming each shareholder receives a pro rata distribution of the corporation’s assetsand assumes a pro rata amount of the liabilities.
b.
Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming Felix receives his share in cash and Rex receives the remainder of theassets and assumes all of the liabilities.
For parts c and d: Assume Felix received the accounts receivable and equipment and assumed theaccounts payable.
c.
Will Felix recognize any income when he collects the accounts receivable?
d.
Will Felix be able to take a deduction when he pays the accounts payable?
For parts e and f: Assume Rex is a corporate shareholder of DCC.
e.
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.
f.
Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming Felix receives $59,000 in cash and Rex receives the remainder of the assetsand assumes all of the liabilities.
