Art owns 80% of Pueblo Corporation stock, and Peggy owns the remaining 20%. Art and Peggy have $320,000 and $80,000 adjusted bases, respectively, for their Pueblo stock. Pueblo owns the following assets: cash, $25,000; inventory, $150,000 FMV and $100,000 adjusted basis; marketable securities, $100,000 FMV and $125,000 adjusted basis; and equipment, $325,000 FMV and $185,000 adjusted basis. Pueblo purchased the equipment four years ago and subsequently claimed $215,000 of MACRS depreciation. The securities are not disqualified property. On July 1 of the current year, Pueblo adopts a plan of liquidation at a time when it has $250,000 of E&P and no liabilities. Pueblo distributes the equipment, $50,000 of inventory, the marketable securities, and $5,000 of money to Art before year-end as a liquidating distribution. Pueblo also distributes $20,000 of cash and $100,000 of inventory to Peggy before year-end as a liquidating distribution.
a. What are the gain and loss tax consequences of the liquidation to Pueblo Corporation and to Art and Peggy?
b. Can you offer any suggestions to Pueblo’s management that could improve the tax consequences of the liquidation? Explain.
c. How would your answers to Parts a and b change if Art and Peggy instead were domestic corporations rather than individuals?