Cartman Corporation owns 90 shares of SP Corporation. The remaining 10 shares ar

Question

Cartman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Cartman decided to liquidate SP Corporations by distributing the assets to Cartman and Kenny. SP reported the following balance sheet at the date of liquidation:

$100,000

a) Compute the gain or loss recognized by SP, Cartman, and Kenny on a complete liquidation of the corporation, where SP distributes $10,000 of cash to Kenny and the remaining assets to Cartman.

b) Compute the gain or loss recognized by SP and Kenny on a complete liquidation of the corporation, where SP distributes the stock investment to Kenny and the remaining assets to Cartman. Assume SP's tax rate is zero.

c) What form needs to be filed with the liquidation of SP?

Adjusted Basis FMV Cash $12,000 $12,000 Accounts Receivable 8,000 8,000 Stock Investment 2,000 10,000 Land 40,000 70,000 Total Assets $62,000 $100,000 Common Stock - Cartman (90%) $10,000 $90,000 Common Stock - Kenny (10%) 7,000 10,000 Total Shareholder Equity $17,000

$100,000

Explanation / Answer

(a):

Cartman:

Assets received ($2000 + $8000 + $10000 + $70000) = $90,000

Amount realized $90,000

Adjustment basis of common stock = (10,000)

Gain recognized (90000-10000) = $80,000

Kenny:

Cash received from SP   =             $10,000

(Amount realized)

Adjustment basis of common stock         =             $(7,000)

Gain recognized (10000 – 7000) = $3,000

SP:

Gain recognized: Stock Investment ($10,000 - $2,000) = $8,000

Land ($70,000 - $40,000) = $30,000

Total gain recognized = $38,000

(b): Same as (a)

(c): Form 996

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