Shauna and Danielle decided to liquidate their jointly owned corporation, Woodward Fashions Inc. (WFI). After liquidating its remaining inventory and paying off its remaining liabilities, WFI had the following tax accounting balance sheet:

FMV Adjusted Basis Appreciation
Cash $200,000 $ 200,000
Building 50,000 10,000 40,000
Land 150,000 90,000 60,000
Total $400,000 $300,000 $ 100,000

Under the terms of the agreement, Shauna will receive the $200,000 cash in exchange for her 50 percent interest in WFI. Shauna's tax basis in her WFI stock is $50,000. Danielle will receive the building and land in exchange for her 50 percent interest in WFI. Danielle's tax basis in her WFI stock is $100,000. Assume for purposes of this problem that the cash available to distribute to the shareholders has been reduced by any tax paid by the corporation on gain recognized as a result of the liquidation. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

What amount of gain or loss does WFI recognize in the complete liquidation?

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aquialaska aquialaska · Answer 1 · 2020-03-30T12:01:13+02:00

Answer:

The gain on transaction of Building is $40,000 and of land is $60,000, so total gain is $100,000.

Explanation:

According to the scenario, the given data are as follows:

Cash Appreciation = $0

Building Appreciation = $40,000

Land Appreciation = $60,000

So, We can analyze the gain or loss for WFI after complete liquidation as follows:

So, on the transaction of the building, as building has an appreciation of $40,000, it will make a gain to WFI of $40,000.

Similarly, on the transaction of land, as land has an appreciation of $60,000, it will make a gain to WFI of $60,000.

So, total Gain = $40,000 + $60,000 = $100,000