Golden Gate Corporation (GGC) was formed in 2016 by two shareholders, Malcolm Jones and Linda Ramirez. Both Malcolm and Linda are U.S. residents. Malcolm contributed $500,000 cash in exchange for 250 shares, or 50% of the common stock. Linda contributed a patent with a value of $500,000 and a tax basis of zero in exchange for 250 shares, or 50% of the common stock. GGC has no other classes of stock.

1. In 2017, Linda loaned the corporation an additional $1,500,000. The loan was documented as a five-year promissory note, with a market interest rate, interest payable quarterly, and the principal of $1,500,000 due in five years.GGC made all interest payments on a timely basis but, in 2022, could not repay the principal. Currently, Linda and GGC have no arrangement regarding when the loan will be repaid.

1. In 2018, GGC needed additional cash. In 2018, it brought in four new investors, Individuals A, B, C, and D, each of whom acquired 100 shares of the corporation's common stock for $250,000 cash. All four individuals are U.S. citizens.

1. In 2018, GGC obtained a loan of $3,000,000 from a bank. The loan was documented as a ten-year promissory note, with a market interest rate, interest payable quarterly, and the principal of $3,000,000 due in ten years.Linda agreed to subordinate her $1,500,000 loan to the bank loan as part of the financing. GGC made all interest payments on a timely basis and has made no principal payments.

1. In 2021, GGC hired a key engineer. As GGC was experiencing cash flow issues, the engineer received 100 shares of stock with an estimated value of $500,000 instead of his first two year's salary.

1. On July 1, 2021, Individual D died, and D's stock in GGC was transferred to D's Estate. The Estate plans to distribute its assets, including its GGC stock, to D's children by June 30, 2023. Delays in settling the Estate's administrative matters might move the distribution date to the end of 2023.

GGC has incurred losses since its inception. GGC's Board of Directors is concerned about the company's future profitability. In 2022, the Directors, Linda, and Malcolm held a meeting to discuss the company's future. The Board considered several options, including liquidation, sale of the stock or assets of the business, and continuing the business with additional financing.

You have been hired by GGC's Board to provide tax advice on several questions. Your objective is to provide the best solutions for the shareholders of GGC as a whole and not just for Linda or Malcolm.

Assume that unless provided otherwise:

• GGC has a net operating loss carryforward of 1,500,000, equal to its accumulated deficit, as of the end of 2022.
• GGC expects to lose an additional 2,040,000 in 2023 and 2024, but then be profitable in the subsequent three years.
• GGC expects the value of its stock to double over the next five years due to achieving profitability and the increase in value of its goodwill and intangibles.
• GGC has a deficit in accumulated earnings and profits of (1,500,000) at the end of 2022.Its earnings and profits (before taxes) are expected to increase by its projected income (loss) for 2023 through 2027, as indicated above.
• Unless otherwise noted, GGC's projected taxable income is equal to its projected pre-tax book income.
• Except for the patent contributed by Linda in exchange for stock, and its equipment, for which accelerated depreciation has been claimed, the tax basis of its assets is equal to book value.
• The company has not paid any dividends and does not plan to do so in the foreseeable future.

TOPIC 1 - Liquidations

Although the Company expects to be profitable, the Board does not believe in the projections and thinks there is a substantial risk to the Company's business plan. The Board wonders if GGC will ever be successful and is considering winding up the corporation.

(a) What would be the tax consequences to the corporation and to the shareholders if:

• GGC adopted a plan of liquidation on January 1, 2023.
• GGC then sold its assets for $12,000,000, paid its liabilities of $6,500,000, paid any taxes owed, and distributed its remaining cash (after payment of any taxes) to its shareholders.

(b) Assume that if GGC is liquidated, Linda would want her original patent back, which is now worth $1,000,000. What would be the tax consequences to the corporation and to the shareholders if:

• GGC adopted a plan of liquidation on January 1, 2023.
• GGC distributed the patent to Linda.
• GGC then sold the rest of its assets for $11,000,000, paid its liabilities of $6,500,000, paid any taxes owed, and distributed its remaining cash (after payment of any taxes) to its other shareholders.

Assume in each case, the sale occurs on January 2, 2023, and liquidation occurs on January 31, 2023, and that the tax basis of the assets as of the date of sale is the same as on December 31, 2022. Assume that other taxable income or loss for 2023 is zero.

Consider the tax consequences to GGC, Linda, Malcolm, and the other investors in your response.Consider any planning opportunities available to GGC, Linda, and Malcolm in minimizing taxes on the sale of the business or the liquidation.

Show your calculations and cite any applicable authority in your answer.

Answer rating: 100% (QA)

GGCs Liquidation Scenario Analysis Tax Consequences of Liquidation a GGC Corporation GainLoss on Asset Sales GGC will recognize capital gains or losses on the sale of its assets at the difference betw... View the full answer