TAX 311

Liquidations

I. A. X Corporation is owned by a single individual, A. X has three assets: Cash $20,000; Inventory FMV $190,000, AB $140,000; Land FMV $180,000, AB $210,000. X adopts a formal plan of liquidation and immediately thereafter distributes its assets to A. A's adjusted basis in his X Corporation stock is equal to $285,000? What are the tax consequences of this liquidation to X Corporation and A?

1. How would your answer to part A change if X Corporation also had liabilities of $40,000?

2. How would your answer to part A change if A had an adjusted basis in his X Corporation stock of $405,000.

3. How would your answer to part A change if X Corporation had a contingent and speculative liability equal to $30,000, which liability was paid by A two years after the corporation was liquidated?

4. How would your answer to part A change if A had contributed the land to X corporation six months earlier in a transaction governed by section 351?

II. A. S Corporation is owned 100% by P Corporation. S has three assets: Cash $20,000; Inventory FMV $200,000, AB $140,000; Land FMV $180,000, AB $210,000. S adopts a formal plan of liquidation and immediately thereafter distributes its assets to P. P's adjusted basis in its S Corporation stock is equal to $285,000? P had acquired S Corporation six years prior to the liquidation. What are the tax consequences of this liquidation to S Corporation and X Corporation?

1. Assume in part A that B an unrelated individual owned 10% of S Corporation and instead of $20,000 of cash, S Corporation owned a machine with a FMV of $20,000 and an adjusted basis of $5,000. B receives this machine from S Corporation pursuant to the plan of liquidation. Assume further that Bs adjusted basis in his S Corporation stock is equal to $13,000. What are the tax consequences to P Corporation, S Corporation and B as a result of the liquidation of S Corporation?

2. Assume in part A that P Corporation has a second 100% owned subsidiary S2, and that S2 owns 50% of S Corporation and P Corporation owns the other 50% of S Corporation. What are the tax consequences of the liquidation to P Corporation, S2, and S Corporation assuming that S2 receives the inventory and P Corporation receives the other assets of S Corporation?