Question

During 2001, Loser Corporation had the following balance sheet:

Asset                                                   FMV               AB

Cash                                                    $40,000           $40,000

Land A                                                $30,000           $80,000

Land B                                                            $30,000           $20,000

Total Assets                                        $100,000         $140,000

Capital Stock/Retained Earnings        $100,000         $140,000

During this year, they made the following liquidating distributions to their shareholders:

                        Shares                          Shareholders

Shareholder Owned    Property          Basis in Stock

Al                    600      Land A and     $30,000

                                    $30,000 cash

Baker               300      Land B                        $50,000

Charlie             100      $10,000 Cash $20,000          

Land A was contributed by Al in 1998. Land B was purchased by the corporation in 1999.

What are the consequences of the transaction to Loser?

Would your answer change if Land A had been distributed to Baker and Land B had been distributed to Al? Why or why not?

What are the tax consequences of the distribution to Al? What basis will he take in the land?

What are the tax consequences of the distribution to Baker? What basis will he take in the land?

What are the tax consequences of the distribution to Charlie?

Answer 1

Answer 1.

As per section 351 of IRS Code. Contribution from shareholders IS non taxable transaction to both the corporation and shareholder. Basis for loser would be CARRYOVER basis and holding period.

Given case LAND A is contributed by shareholder so basis for the LAND A would be CARRYOVER. But for LAND B that is purchased by LOSER would be purchase price not carry over basis.

Answer 2

In both the case there will be same treatment. That is recognition of gain or loss by both corporations and shareholder. Contribution from Al doesnot determine the distribution.

Answer 3

Distribution to shareholder is taxable at both corporations and shareholder level. For shareholders it is capital gain or loss. But for corporations it is ordinary gain or loss.

Tax consequences

Gain/Loss by corporation FMV - Basis I.e. $ 80,000-$30,000

Ordinary gain of $10,000.

Gain/Loss by shareholder FMV OF LAND + CASH - CAPITAL BAIS I.e. $ 80,000+$ 30,000-$ 60,000

Capital gain of $ 30,000.

Basis for shareholders after distribution would be FMV so AL Basis would be $ 80,000.

Answer 4

Gain/ Loss by corporation FMV - BASIS OF property $20,000 -$10000

Ordinary loss of $(10,000).

Gain / Loss by shareholder FMV + CASH - BASIS OF capital

$20,000+0 -$50,000

Capital loss of $(30,000).

BASIS of Land after distribution would be $20,000.

Answer 5

Distribution to Charlie

Gain/ loss by CORPORATION/SHAREHOLDER

Cash distributed-capital basis

$10,000 -$20,000

Ordinary loss for corporations would be $(10,000)

Capital loss for shareholder would be $(10,000).