Tax Consequences of Liquidating Acme Corporation for Joe and the Corporation
What are the tax consequences to Joe and Acme Corporation as a result of the liquidation of Acme Corporation?
How will Joe's basis in the property received be determined?
What tax implications does the mortgage on the property have for Joe?
Tax Consequences of Liquidation:
When Acme Corporation is liquidated, the tax consequences to Joe, the sole shareholder, and Acme Corporation are as follows:
Tax Consequences to Joe:
a) Joe will recognize a capital gain of $40,000 on the distribution of the property, calculated as the difference between the FMV of $100,000 and his basis in the Acme stock of $60,000.
b) Joe's basis in the property received will be $60,000, which becomes his new basis for future tax calculations.
c) Joe will not recognize any income or gain on the cancellation of debt from the mortgage since the mortgage exceeds the FMV of the property received.
Tax Consequences to Acme Corporation:
a) Acme Corporation will have a gain of $30,000 on the distribution of the property, calculated as the difference between FMV of $100,000 and the adjusted basis of $70,000.
b) Acme Corporation will report this gain on its final corporate tax return.
Explanation of Tax Consequences:
When Acme Corporation is liquidated, Joe as the sole shareholder will incur a capital gain of $40,000 on the distribution of the property. This gain is the result of the difference between the fair market value of the property received and Joe's basis in the Acme stock surrendered.
Joe's basis in the property received will be $60,000, as it is equal to his basis in the Acme stock surrendered. This new basis will be used for any future tax calculations related to the property.
Regarding the mortgage on the property, Joe will not recognize any income or gain from its cancellation, as the mortgage amount exceeds the fair market value of the property received.
On the other hand, Acme Corporation will realize a gain of $30,000 from the distribution of the property. This gain is the result of the difference between the fair market value of the property and its adjusted basis. Acme Corporation will need to include this gain in its final corporate tax return.
It is essential to remember that the specific details and circumstances of a liquidation can affect the tax consequences. Consulting with a tax professional is recommended for personalized and accurate advice.