Michelle owns 100% of Kappa Corporation's common stock. Kappa is an accrual basis, calendar year corporation. Michelle formed the corporation six years ago by transferring $175,000 of cash in exchange for the Kappa stock. Thus, she has held the stock for six years and has a $175,000 adjusted basis in the stock. Kappa's balance sheet at January 1 of the current year is as follows:

Assets			Basis				FMV
Cash		$470,000				$470,000
Marketable securities		30,000				105,000
Inventory		350,000				390,000
Equipment		240,000				285,000
Building		540,000				782,000
Total		$1,630,000				$2,032,000
Liabilities and Equity
Accounts payable		$160,000				$160,000
Common stock		175,000				1,872,000
Retained earnings (and E and P)		1,295,000
Total		$1,630,000				$2,032,000

Kappa has held the marketable securities for two years. In addition, Kappa has claimed $30,000 of MACRS depreciation on the machinery and $160,000

of straight-line depreciation on the building. On January 2 of the current year, Kappa liquidates and distributes all property to Michelle except that Kappa retains cash to pay the accounts payable and any tax liability resulting from Kappa's liquidation. Assume that Kappa has no other taxable income or loss. Assume a 34% corporate tax rate.

Tax consequences for Kappa assuming the same facts except that on January 2 of the current year Kappa liquidates. After retaining cash to pay the accounts payable and tax liability resulting from the liquidation, all property is distributed to Michelle. Kappa recognizes gain under Sec.336(a) as follows:

						Gain or loss recognized
		FMV	-	Adjusted cost basis	=	Amount		Character
	Marketable securities	$105,000	-	$30,000	=	$75,000		Capital gain
	Inventory	$390,000	-	$350,000	=	$40,000		Ordinary income
	Equipment	$285,000	-	$240,000	=	$45,000		$30,000 ordinary income and $15,000 capital gain
	Building	$782,000	-	$540,000	=	$242,000		$32,000 ordinary income and $210,000 capital gain
	Total					$402,000
	Times: Tax rate					34	%
	Tax liability					$136,680

Tax consequences for Michelle assuming the same facts except that on January 2 of the current year Kappa liquidates. After retaining cash to pay the accounts payable and tax liability resulting from the liquidation, all property is distributed to Michelle. Michelle recognizes gain under Sec. 331(a) as follows:

Cash + FMV of noncash property received

-

Adjusted basis of stock

=

Gain (loss) recognized

$1,735,320

-

$175,000

=

$1,560,320

Michelle takes the following FMV bases under Sec. 334(a):

Property received	Basis
Cash	$173,320
Marketable securities	105,000
Inventory	390,000
Equipment	285,000
Building	782,000

Assume the same facts as in this problem except, on January 2 of the current year, Kappa Corporation sells all property other than cash to Merger Corporation for FMV. Kappa pays off the accounts payable and retains cash to pay any tax liability resulting from Kappa's liquidation. Kappa then liquidates and distributes all remaining cash to Michelle. Assume that Kappa has no other taxable income or loss. Determine the tax consequences to Kappa, Merger, and Michelle.

How do these results compare to those originally presented in the problem?