What is the amount and character of gain or loss Kevin will recognize when he receives the liquidating distribution of cash and

Question

3 years ago

14

What is the amount and character of gain or loss Kevin will recognize when he receives the liquidating distribution of cash and

property? Recall that his stock basis is $100,000 and he is treated as having sold his stock for the liquidation proceeds.

Business

1 answer:

masha68 [24] · Answer 1 · 2022-01-30T18:27:06+03:00

Answer:

$136,500 long term capital gain

Explanation:

First of all, we must adjust SOA's cash since it has to pay taxes for the $90,000 gain. Its marginal tax rate was 30%, which means it must pay $27,000 in taxes (= $90,000 x 30%). So SOA's cash account will decrease to $173,000.

The total value of SOA's assets is $473,000 ($500,000 - taxes) which includes:

cash: $173,000
inventory: $80,000
land and building: $220,000

When the assets are liquidated, the proceeds should be equally divided between Kevin and Bob, so each will get $236,500. Since Kevin's basis is $100,000, he should report a $136,500 long term capital gain (= $236,500 - $100,000).