Question

Bluebird Corporation owns and operates busses and has decided to liquidate its operations. Victor, who owns 80% of the company's stock, will receive all of the busses, repair parts inventory, and all tools and equipment. He plans to start a bus company in another town. Penny, who owns 20% of the stock, wants nothing to do with the new bus business and will receive a cash distribution. Bluebird will incur about $20,000 of expenses in connection with the liquidation.

What tax issues should Victor, Penny, and Bluebird consider with respect to the liquidation?

Answer 1

Answer: Bluebird Corporation can deduct the liquidation expenses in its final tax return.

Step-by-step explanation:

Bluebird Corporation will need to recognize the gain that are realized on the distribution of the Bluebird cars, support vehicles, the repair parts inventory, tools, and the equipment.

Bluebird recognizes no loss on the disposition of the items because they are distributed to a related party and Penny recognizes no gain on distribution because he receives only cash.

Victor and Penny will need to determine their realized gains on the liquidation, therefore Bluebird Corporation can deduct the liquidation expenses from its final tax return.

Any net operating loss that is incurred in the final year can be carried back to the two preceding tax years.