Question

ework i Saved Problem 4-59 (LO 4-3) (The following information applies to the questions displayed below.] Kevin and Bob have owned and operated SOA as a C corporation for a number of years. When they formed the entity. Kevin and Bob each contributed $100,000 to SOA, They each have a current basis of $100,000 in their SOA ownership interest. Information on SOA's assets at the end of year 5 is as follows (SOA does not have any liabilities): Adjusted Basis Built-in Gain Assets FMV Cash $200,eee $ 200,000 $ 80, e00 220, 000 Inventory Land and building 40,000 170,000 40, 000 50, 000 Total $500, eee At the end of year 5, SOA liquidated and distributed half of the land, half of the inventory, and half of the cash remaining after paying taxes (If any) to each owner. Assume that, excluding the effects of the liquidating distribution, SOA's taxable Income for year 5 is $0. Problem 4-59 Part a a. What is the amount and character of gain or loss SOA will recognize on the liquidating distribution? Distribution of the inventory Distribution of the land and building < Prev Next > 19 20 of 20

Answer 1

a.	Gain on the distribution of inventory	$40,000
	Gain on distribution Land & Building	$50,000
	Total gain on the distribution	$90,000
	Note: Assumes that SOA has sold its assets at the Fair Market Value
b.	$136,500 long-term capital gain. SOA must pay tax on the $90,000 of income it recognizes in the distribution.
	Because its marginal rate is 30% it pays $27,000 tax on the distribution. (Assume tax rate is 30%)
	The fair market value of the assets SOA distributes to its shareholders is $473,000 ($500,000 total value minus $27,000 taxes).
	One-half of the $473,000 ($236,500) is distributed to Kevin. Consequently, Kevin’s long-term capital gain on the distribution is
	$136,500 ($236,500 received minus $100,000 basis in his stock).