Question

Pearson's federal taxation chapter 6

C.6-35 Corporate Formation/Corporate Liquidation. Len Wallace contributed assets with a $100,000 adjusted basis and a $400,000 FMV to Ace Corporation in exchange for all of its single class of stock. The corporation conducted operations for five years and was liqui- dated. Len received a liquidating distribution of $500,000 cash (less federal income taxes owed on the liquidation by the corporation) and the assets that he had contributed, which now have a $100,000 adjusted basis and a $500,000 FMV. Assume a 21% corporate tax rate. a. What are the tax consequences of the corporate formation transaction? b. What are the tax consequences of the corporate liquidation transaction? c. Would your answers to Parts a and b remain the same if instead the assets had been contributed by Wallace Corporation to Ace Corporation? If not, explain how your answer(s) would change?

Answer 1

Answar The assets adjustd basis to Len 'is f los, 00 0 . Th may ket vakuc dr the assts o the imc Contibution y00,000 Tealiscdis detemined by the has om he FMV Yaiacd Compet the Gain Takied mavket value -adjuskd basis 400,000-lo0,000 F300, 000 . Len 7cai3cs a gain d, x00,000. Howcer unde settion 3sı ta) , kn will e cogniae the gan none Tcaad undei skition 358 (a), Len!g basis fo A stock is $100, 000. Cund, settion 3iaCa), A coporartion 4 basis for the asset is 4 ta0,000

dishibertion d The adjused bacis art the 4 s100, 000. he FMvat the ime dr dstibution is $ co0 000 now Compute the gain Tcaliacd Gan acd e FMy- adjusted basis 00,000 1 500,000- 400, 000 A Corporation recogntac Jain tuoo,000 uhen -the a ass ave dish buld to Len ,unde stion 336 Ca) Now Giain xTax atc 400,000 x 21/. 84000 Comput the aftev- tar cash disthibution Cosh dishbution Gain Tax S00,000-uo00 416000

to Len the Compute Gam on cd cash Fmv-adjustd baás u16000 So0) 000 - *84000 $ 3,000 unde seion 321 Ca), Len oil cegniac a gain d fesa,000 Considey Pait ta), ia yfomadion qnesal Cop orateformations , -the an storr to part ta) sinte seut on 35 1 applies tothc and wi Tmain the same NOw Consider partb) sections 33 2 & 331 to the qudaion, since w Cor povartion s hk pavent Copoation of A coporain A Coporaton ai not Teagnac any gain | foss hen the distihuton is mod to apor ent corporartian.

Also, w Copoalion net cg goinos s the stock o tash and tvhangs when wCoporaton the appreiatd asset he basi -the appreiatid asset canics fam ACorpotion to coporortion Ovei Al:0,Corpora tion recoves f500,00 0 amourt dash choogd The ancwY to part (b) is