Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years ofoperations using the accrual method, they decided to liquidate the corporation and operate thebusiness as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve thecorporation, but they need some tax advice from you, their trusted accountant. They are hoping youwill find a way for them to liquidate the corporation while minimizing their total income tax liability.

Rex has a tax basis in his shares of $94,000 and Felix has a tax basis in his shares of $64,000.DCC's tax accounting balance sheet at the date of liquidation is as follows:

AdjustedBasisFMV

Assets

Cash$64,000$64,000

Accounts receivable44,00044,000

Inventory44,00054,000

Equipment64,00054,000

Building49,00064,000

Land39,00074,000

Total assets$304,000$354,000

Liabilities

Accounts payable$39,000

Mortgage payableBuilding44,000

Mortgage payableLand44,000

Total liabilities$127,000

Shareholders' Equity

Common stockRex (80%)$181,600

Common stockFelix (20%)45,400

Total shareholders equity$227,000

Required:

a.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming each shareholder receives a pro rata distribution of the corporation's assetsand assumes a pro rata amount of the liabilities.

b.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming Felix receives his share in cash and Rex receives the remainder of theassets and assumes all of the liabilities.

For parts c and d: Assume Felix received the accounts receivable and equipment and assumed theaccounts payable.

c.

Will Felix recognize any income when he collects the accounts receivable?

d.

Will Felix be able to take a deduction when he pays the accounts payable?

For parts e and f: Assume Rex is a corporate shareholder of DCC.

e.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming each shareholder receives a pro rata distribution of the corporation's assetsand assumes a pro rata amount of the liabilities.

f.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming Felix receives $59,000 in cash and Rex receives the remainder of the assetsand assumes all of the liabilities.