Question

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Tax Basis Appreciation
Cash 200,000 200,000
Building 200,000 100,000 100,000
Land 100,000 150,000 (50,000)

Total 500,000 450,000 50,000

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

Answer 1

Michelle will recognize a gain of $50,000 on the building in the complete liquidation, and her tax basis in the building will be $100,000.

Step-by-step explanation:

In the complete liquidation, Michelle will recognize a gain of $50,000 on the building. This is calculated by taking the fair market value of the building ($200,000) minus her tax basis ($100,000). Her tax basis in the building after the complete liquidation will be the same as the tax basis of the Pennsylvania stock she exchanged for the building, which is $100,000.