Michelle owns 100% of Zeta Corporation's common stock. Zeta is an accrual basis, calendar-year corporation. Michelle formed the corporation six years ago by transferring $225,000 of cash in exchange for the Zeta stock. Thus, she has held the stock for six years and has a $225,000 adjusted basis in the stock. Zeta's balance sheet on January 1 of the current year is as follows:

Assets Basis  FMV 

Cash $435,000 $435,000

Marketable securities 30,000 55,000

Inventory 340,000 390,000

Equipment 230,000 290,000

Building 580,000 846,000

Total $1,615,000 $2,016,000

Liabilities and Equity

Accounts payable $160,000 $160,000

Common stock 225,000 1,856,000

Retained earnings (and E&P) 1,230,000

Total $1,615,000 $2,016,000

In addition, Zeta has claimed $55,000 of MACRS depreciation on the machinery and $150,000 of straight-line depreciation on the building. On January 2 of the current year, Zeta liquidates and distributes all property to Michelle except that Zeta retains cash to pay the accounts payable and any tax liability resulting from Zeta's liquidation. Assume that Zeta has no other taxable income or loss.

Requirement

Determine the tax consequences to Zeta and Michelle. Assume a 21% corporate tax rate. Zeta has held marketable securities for two years.

Let's begin by determining the tax consequences for Zeta. Select the property needed to compute Zeta's total gain or loss, compute the gain or loss for each asset and determine the character for each gain or loss. Then, compute Zeta's total gain or loss and compute Zeta's tax liability.