Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years ofoperations using the accrual method, they decided to liquidate the corporation and operate thebusiness as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve thecorporation, but they need some tax advice from you, their trusted accountant. They are hoping youwill find a way for them to liquidate the corporation while minimizing their total income tax liability.

Rex has a tax basis in his shares of $110,000 and Felix has a tax basis in his shares of $80,000.DCC’s tax accounting balance sheet at the date of liquidation is as follows:

                          AdjustedBasis                                  FMV

Assets

 

 

Cash                                    $64,000                        $64,000

 

Accounts receivable             44,000                            44,000

 

Inventory                                   44,000                             54,000

 

Equipment                                 64,000                               54,000

 

Building                                       49,000                            64,000

 

Land                                                 39,000                         74,000

 

Total assets                                       $304,000                   $354,000

 

Liabilities

 

Accounts payable                                                                $39,000

 

Mortgage payable—Building                                                 44,000

 

Mortgage payable—Land                                                         44,000

 

Total liabilities                                                                         $127,000

 

Shareholders’ Equity

 

Common stock—Rex (80%)                                                  $181,600

 

Common stock—Felix (20%)                                                   45,400

 

Total shareholders equity                                                       $227,000

 

Required:

a.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming each shareholder receives a pro rata distribution of the corporation’s assetsand assumes a pro rata amount of the liabilities.

b.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of thecorporation assuming Felix receives his share in cash and Rex receives the remainder of theassets and assumes all of the liabilities.

For parts c and d: Assume Felix received the accounts receivable and equipment and assumed theaccounts payable.

c.

Will Felix recognize any income when he collects the accounts receivable?

d.

Will Felix be able to take a deduction when he pays the accounts payable?

For parts e and f: Assume Rex is a corporate shareholder of DCC.

e.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming each shareholder receives a pro rata distribution of the corporation’s assets and assumes a pro rata amount of the liabilities.

f.

Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming Felix receives $59,000 in cash and Rex receives the remainder of the assetsand assumes all of the liabilities.