Pamela owns 100% of Sigma Corporation’s stock. She purchased her stock ten years ago, and her current basis for the stock is $300,000. On June 10, Pamela decided to liquidate Sigma. Sigma’s balance sheet prior to the sale of the assets, payment of the liquidation expenses, and payment of federal income taxes is as follows:

• The corporation has claimed depreciation of $150,000 on the equipment.

• The corporation received the marketable securities as a capital contribution from Pamela three years earlier at a time when their adjusted basis was $90,000 and their FMV was $70,000.

• Sigma incurred $20,000 in liquidation expenses in its final tax year.

a. What are the tax consequences of the liquidation to Pamela and Sigma Corporation? Assume a 21% corporate tax rate.

b. How would your answer change if Pamela contributed the marketable securities six years ago?

Transcribed Image Text:

Assets Basis FMV $ 240,000 80,000 200,000 680,000 Cash Marketable securities $240,000 90,000 150,000 320,000 Equipment Land Total $800,000 $1,200,000 Equity $300,000 500,000 $800,000 Common stock $1,200,000 Retained earnings (and E&P) Total $1,200,000