Queen Corporation adopts a plan of complete liquidation on January 1 of the current year. The corporation sells the assets listed below to King Corporation during the current year. This sale is followed by the assumption of Queen’s liabilities by King Corporation and a single liquidating distribution of $1,200,000 cash to Ahmed (Queen’s sole shareholder) on December 12 of the current year. Ahmed has a $400,000 basis in his Queen stock, which he has held for seven years. The following facts are relevant:
• Inventory costing $600,000 is sold to customers for $1,000,000.
• Depreciable fixed assets with a $2,000,000 adjusted basis are sold for $3,000,000. Depreciation recapture under Sec. 1245 is $800,000.
• Land held as a capital asset with a $4,000,000 adjusted basis is sold for $5,000,000.
a. What are the tax consequences of the liquidation to Queen?
b. What are the tax consequences to Ahmed upon his receiving the liquidating distribution?
c. How would your answers to Parts a and b change if the assets were instead distributed to Ahmed in exchange for his Queen stock and Ahmed then proceeded to sell the assets for the prices indicated above?