Answer:
Assets FMV Adjusted Basis Built-in Gain
Cash $200,000 $200,000 $0
Inventory $80,000 $40,000 $40,000
Land and Bldg $220,000 $170,000 $50,000
total $500,000
A) Since SOA is making a liquidating distribution, it will be taxed as if they sold their assets at fair market value:
- distribution of the inventory results in a $40,000 ordinary gain = $40,000 x 30% = $12,000 in taxes
- distribution of the land and building results in a $50,000 Sec. §1231 gain = $50,000 x 30% = $15,000 in taxes
total recognized gain = $90,000 (= $40,000 + $50,000)
B) After taxes are paid, SOA's total assets = $500,000 - $27,000 = $473,000 which must be divided equally between Kevin and Bob. Each owner should receive $236,500.
So Kevin's gain = $236,500 - $100,000 = $136,500
