5. (5 pts). Z Corp was formed by four shareholders, each contributing $10K in cash in

exchange for 25% of Zs voting common stock. The shareholders have made no further

contributions. After several years of operating, Z adopts a plan of liquidation and

distributes all of its assets (basis = $40K; FMV = $120K) to the shareholders, i.e., each

shareholder receives $30K of Zs assets upon liquidation. At the time of liquidation, Z

had $125K in current E&P and no accumulated E&P.

a. What are the tax consequences to Z and its shareholders upon liquidation?

b. How would the answer change if FMV of the assets distributed in liquidation was

$20K instead of $120K?

c. What if Z sold these assets to a third party for $20K and distributed the proceeds

to the shareholders upon liquidation?