Question

The stock of Orr Corporation (E & P of $1.5 million) is owned as follows: 90% by Hoff Corporation (basis of $900,000), and 10% by Zoe (basis of $70,000). Both shareholders acquired their shares in Orr more than six years ago. In the current year, Orr Corporation liquidates and distributes land (fair market value of $1.1 million, basis of $1.3 million) and equipment (fair market value of $700,000, basis of $410,000) to Hoff Corporation, and securities (fair market value of $200,000, basis of $260,000) to Zoe.

What are the tax consequences of these distributions to Hoff, to Orr, and to Zoe?

ANSWER:

Answer 1

Period of Holding of Stock by Hoff Corporation and Joe: 6 Years

Nature of Capital Gain to Hoff Corporation and Joe : Long Term Capital Gain

Name	CV (E&P)	Cost Basis	Distributed Asset FV
Hoff Corporation	1350000	900000	1800000
Joe	150000	70000	200000

In case of Liquidation Distribution of assets is taxable for both the Shareholder and Company.

Tax Consequence in the hands of Shareholder: It is treated as Sale of Stock by Shareholder to Company.

Fair Market Value of Asset received - Basis of Stock

Long Term Capital Gain for Hoff Corporation:

18,00,000-9,00,000 = 9,00,000

Long Term Capital Gain for Joe:

2,00,000 - 70,000 = 1,30,000