Question

Luther Corporation has been owned for six years with its stock held 60 percent by John (Stock basis of $162,000) and 40 percent by Alice (stock basis of S181,575). John and Alice are not related. Luther Corporation has the following assets on December 31, 2019: Adjusted Basis to Luther Corporation Fair Market value Cash. ...........................$ 8,100 .................................. 8,100 - Inventory ............................................ 113.400 ... ............... 40,500 - Office building ................... .......40,500 - Stock held for investment.................24,300 ......................... 42,000 in unrelated Corporation - Land.............. ............15,000 ............. ..39,300 - Equipment ........ .............. 270,000 ...................... 121,500 ... 162.000 The equipment was contributed to Luther Corporation 15 months ago as a capital contribution but has never been used in Luther's business operations since the shareholders were planning to liquidate Luther Corporation in the near future. At the time the equipment was contributed to Luther Corporation, it had an adjusted basis of $222,750 and a fair market value of $182,250. The inventory was manufactured by Luther Corporation. Structure a complete liquidation of Luther Corporation that will minimize any corporate tax liability to Luther Corporation and individual tax on the shareholders assuming that there is no potential buyer for any of Luther's assets. Give the tax consequences of your proposed liquidation to Luther Corporation and to both of its shareholders assuming a 21 percent tax rate on any gain recognized on the liquidation by Luther Corporation.

Answer 1

Luther Corporation:
Fair market value of assets:
Particulars	Cash
Cash	8100
Inventory	40500
Office building	162000
Stock held for investment
in unrelated corporation	42000
Land	39300
Equipment	121500
Total amount relaised	413400
Less: Value as per books	471300
	-57900
Loss on sale of the Company	-57900
Tax liability of Luther Corporation	Nil
Tax liability of John
Sale consideration received	248040
Less: Amount of Investment	182000	162000+20000
	66040
Tax liability @21%	13868.4
Tax liability of Alice
Sale consideration received	165360
Less: Amount of Investment	201575	181575+20000
Capital loss	-36215
Tax liability- Nil
Here I assumed that 15 months ago the capital contribution of equipment
is given by both the partners in 50:50 ratio.
And at that time the value in adjustment basis is $222750, fair market value is
$182250. So in the books of accounts the luther corporation the fair market value
would have taken. So the difference amount of $ 40000 is added in shareholders
investment in 50:50 ratio.
Here I assume that no other liabilities for the company except equity and retained earnings
So, the total amount of realisations transferred to their sharing ratio of 60:40