X owns a rental building (its only asset) with a gross FMV of $1,000, subject to
ID: 2594264 • Letter: X
Question
X owns a rental building (its only asset) with a gross FMV of $1,000, subject to a nonrecourse mortgage of $400. X’s adjusted basis for this building is $300. A owns all of X’s stock, with a basis of $100. X has $200 of E&P. X is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by X on $700 gain is $250 and on $600 gain is $200.
For each of the following problems (1) through (7) below, determine the amounts and character of realized and recognized gain or loss to all parties, the time of recognition, and the transferee's basis in any property received in kind.
(1) X sells the building, subject to the mortgage, to B in the current year for $600 in cash. X then liquidates, distributing to A all of the cash remaining after paying its taxes, in cancellation of A's stock in the current year. Alternatives:
(a) B pays $300 in cash and gives A a $300 (face and FMV) note payable in equal annual installments plus interest over 5 years. In liquidation, X distributes the net cash and the note to A in the year of sale.
(b) X’s plan of liquidation provides that X will stay in existence for five years for the sole purpose of collecting the note and paying the net amount over to A annually.
(2) X adopts a plan of complete liquidation and distributes the property to A "in kind" pursuant to this plan. A then sells the property to B for $600 in cash, with B taking subject to the $400 mortgage.
Explanation / Answer
X (Wholly owned by A) $ Basis 100 X's E & P 200 FMV of building 1000 Mortgage 400 Adjusted basis 300 Answers: 1 X sells the building subject to the mortgage to B in the current year for cash 600 and liquidates Gain on sale 300 300 recognized at time of sale Tax (assumed 1/3) 100 Net gain on sale 200 Cash paid to A 200 Alternatives (1) (a) B pays in cash 600 Gives Note Payable in 5 instalments with interest 300 Gain on purchase Adjusted basis 300 Gain on purchase 300 X distributes the net cash and the note in liquidation to A A's gain on X's liquidation (cash) 300 Note payable 300 (b) (2) X's plan of complete liquidation Distribution to A in kind 1000 Mortgage 400 Net 600 A's adjusted basis 300
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