Question

3. In a liquidating distribution, Business Corporation distributes land to its shareholder Ferrell (an individual). Business Corporation acquired the land in a §351 transfer 6 year ago from Ferrell. At the time of the transfer into the Corporation, the land had basis of $700,000 and FMV of $1,000,000. At the time of distribution to Ferrell, the FMV of the land is $500,000. Ferrell owns 40% of the corporation and his stock basis is $150,000. Ferrell’s sister owns the remaining 60% of Business Corporation. At the time of the distribution Business Corp’s current E&P is $50,000 and accumulated E&P is $180,000. (5.5 Points)

a. What are the consequences to Business Corporation on the distribution? (2 points)

b. What are the consequences to Ferrell on the distribution? (1.5 points)

c. What tax planning advice would you offer Business Corp and Ferrell to achieve a more favorable tax result? Note any assumptions you may have made in providing your answer. (2 points)

Answer 1

Answer:

a)

Distribution of assets in kind by the organization to the investors or shareholders would bring about gain or loss to the business corporation . The gain or loss would be contrast between the fair market value (FMV)  and balanced basis of asset .In the said cases the loss would be ( $ 5,00,000 - $ 7,00,000) i.e $ 2,00,000 .

b)

At the point when the organization distribute assets for the investors during complete liquidation it would be treated as return of capital and thus capital increase or loss would be calculated.Capital gain or loss would be equivalent to the contrast between FMV of the property being dispersed and investors basis in stock or ferrell stock basis. In the present case ($ 5,00,000 - $ 1,50,000) i.e is $ 3,50,000 would be capital increase or capital gain . Anyway the said gain could be perceived just post the last distribution.

c)

In the event of corporate liquidation twofold taxation arises.Tax implication in the books of business corporation on dispersing the property and tax implication in investor hands on accepting the property in return of stock .However to avoid most extreme tax outflow the business corporation ought to disseminate the property to the investors rather than cash.If the property is distributed at FMV the subsequent implication when the property is sold by the investor would be least.