Lesson $8$B:

Assumption: Y owns $100\%$ of the stock of X $($all common$)$ with basis of $$100.$ X owns a rental building $($its only assets$)$ with a gross FMV of $$1,000,$ subject to a non$-$resource mortgage of $$400.$ X$$s adjusted basis in this building is $$300.$ X has $$200$ of E&P$.$ X is on the accrual method of accounting and reports on the calendar year. X and Y do not report on a consolidated basis.

For each of the following problems, determine the character and amounts of realized and recognized gain or loss to all parties, the time of recognition, the transferee$$s basis in any property received in kind, and any E&P impact.

$1.$ X sells its building to Z for $$600$ cash, subject to debt, pays its tax, and liquidates.

$2.$ X distributes the building to Y in complete liquidation and Y sells the building to Z for $$600$ cash, subject to the debt.

$3.$ Y sells the X stock to Z for $$600$ and Z liquidates X$.$ Should Z make a section $338$ election instead of liquidation X$?$ In answering this question, describe how section $338$ would work on these facts. Can you think of other facts that would make a section $338$ election attractive? What if X$$s basis in the building is $$1,500,$ section $338$ is not elected, and Z liquidates X within two years? Was Z wise in agreeing to this deal under the original facts? If you represented Z and were interest on negotiating the built$-$in tax out of the stock price, and if Y and X filed a consolidated return, what would you recommend?

$4.$ Same as $(2)$ above, except X$$s debit is $$1,100,$ not $$400.$