Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you will 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 $60,000 and Felix has a tax basis in his shares of $30,000. DCC's tax accounting balance sheet at the date of liquidation is as follows: Assets Cash Accounts receivable Inventory Equipment Building Land Total assets Liabilities Accounts payable Mortgage payable-Building Mortgage payable-Land Total liabilities Shareholders' Equity Common stock-Rex (80%) Common stock-Felix (20%) Total shareholders equity Assume Rex is a corporate shareholder of DCC. Adjusted tax basis $ 30,000 10,000 FMV $ 30,000 10,000 10,000 20,000 30,000 20,000 15,000 30,000 5,000 40,000 $ 100,000 $ 150,000 $ 5,000 10,000 10,000 $ 25,000 $ 100,000 25,000 $ 125,000 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 $25,000 in cash and Rex receives the remainder of the assets and assumes all the liabilities. Note: For both requirements, negative amounts should be indicated by a minus sign. Leave no answers blank. Enter zero if applicable. Show less▲
Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you will 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 $60,000 and Felix has a tax basis in his shares of $30,000. DCC's tax accounting balance sheet at the date of liquidation is as follows: Assets Cash Accounts receivable Inventory Equipment Building Land Total assets Liabilities Accounts payable Mortgage payable-Building Mortgage payable-Land Total liabilities Shareholders' Equity Common stock-Rex (80%) Common stock-Felix (20%) Total shareholders equity Assume Rex is a corporate shareholder of DCC. Adjusted tax basis $ 30,000 10,000 FMV $ 30,000 10,000 10,000 20,000 30,000 20,000 15,000 30,000 5,000 40,000 $ 100,000 $ 150,000 $ 5,000 10,000 10,000 $ 25,000 $ 100,000 25,000 $ 125,000 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 $25,000 in cash and Rex receives the remainder of the assets and assumes all the liabilities. Note: For both requirements, negative amounts should be indicated by a minus sign. Leave no answers blank. Enter zero if applicable. Show less▲
Chapter7: Losses—deductions And Limitations
Section: Chapter Questions
Problem 84TA
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Transcribed Image Text:Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years of operations using the accrual
method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up
the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you
will 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 $60,000 and Felix has a tax basis in his shares of $30,000. DCC's tax accounting balance sheet at
the date of liquidation is as follows:
Assets
Cash
Accounts receivable
Inventory
Equipment
Building
Adjusted tax
basis
FMV
$ 30,000
$ 30,000
10,000
10,000
10,000
20,000
30,000
20,000
15,000
30,000
5,000
40,000
$ 100,000
$ 150,000
Land
Total assets
Liabilities
Accounts payable
Mortgage payable-Building
Mortgage payable-Land
Total liabilities
Shareholders' Equity
Common stock-Rex (80%)
Common stock-Felix (20%)
Total shareholders equity
Assume Rex is a corporate shareholder of DCC.
$ 5,000
10,000
10,000
$ 25,000
$ 100,000
25,000
$ 125,000
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 $25,000 in cash and Rex receives the remainder of the assets and assumes all the liabilities.
Note: For both requirements, negative amounts should be indicated by a minus sign. Leave no answers blank. Enter zero if
applicable.
Gain or loss recognized by Rex
Gain or loss recognized by Felix
Gain or loss recognized by DCC
Part E
Part F
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