Assume Ivan owns 60% of Rus and Catherine (also an individual and unrelated to I

Question

Assume Ivan owns 60% of Rus and Catherine (also an individual and unrelated to Ivan) owns the other 40%. Rus’s total assets are $300, consisting of cash of $180 and a piece of real estate acquired from an unrelated party worth $120. The adjusted basis in the property is $140 (so if the property were sold there would be a $20 loss). In liquidation Catherine gets the real estate (worth $120) and Ivan gets $180 cash (remember Ivan owns 60% of the stock so he gets assets worth $180 which is worth 60% of the total assets of $300). Note these questions all ask about the distributing corporation Rus not the shareholders.

a) Does Rus have taxable gain or loss on the distribution to Catherine? Explain.  

b) Does the answer from part a change if the piece of property had been acquired for a valid business reason in a section 351 exchange 4 years ago?   

c) Suppose the property was acquired 10 years ago and that Catherine gets 120 in cash and Ivan gets 60 cash and the real estate. What are tax consequences to Rus on the distribution to Ivan?   

d) Ivan gets cash of $108 (that’s 60% of the $180 in cash) and a 60% tenancy in common in the land (60% times the 120 value of the land is 72, so Ivan gets $108 in cash and $72 in land for $180 in total). Catherine gets a 40% tenancy in common of the land and cash of $72. The land was bought ten years ago from a third party. What are the tax consequences to Rus on the distributions?

Explanation / Answer

(a) Yes Rus will recognised capital loss on transfer of propery because adjusted basis of the Rus is $ 140 and Rus transferring the property to  catherine at $ 120 .

Capital loss will be recognised by Rus = 140 - 120 = $20

(b)No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.

(c) Same treatment as "a" because answer doesn' change either we have transferred the property to Cathrine or Ivan

(d)

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