Question

Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Tax Basis FMV Appreciation
Cash 100,000 100,000
Building 150,000 200,000 50,000
Land 50,000 120,000 70,000

Total 300,000 420,000 120,000

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Amelia recognize in the complete liquidation?

Answer 1

In the complete liquidation of Amelia, Inc., the corporation recognizes a gain of $120,000, which is the difference between the FMV of the distributed assets ($420,000) and their aggregate tax basis ($300,000).

Step-by-step explanation:

In the liquidation of Amelia, Inc., the corporation would recognize a gain on the distribution of its assets to Gary and Laura. Since corporations are separate taxable entities, the gain is calculated as the difference between the fair market value (FMV) and the tax basis of the assets distributed.

Amelia, Inc. distributed cash with a FMV of $100,000 and real property (the building and land) with a combined FMV of $320,000, totaling $420,000 in FMV of distributed assets. The aggregate tax basis for these assets is $300,000 ($100,000 for cash, $150,000 for building, and $50,000 for the land).

Therefore, the corporation would recognize a gain of $120,000 ($420,000 FMV - $300,000 tax basis) in the complete liquidation.