Casey Corporation has three assets when it decides to liquidate: The corporation sells the stock for its fair market value and distributes the other two assets to its sole shareholder. What is its tax liability on its final tax return in 2018 if it had $45,000 of income from operations prior to liquidating?

Question

Casey Corporation has three assets when it decides to liquidate:  The corporation sells the stock for its fair market value and distributes the other two assets to its sole shareholder. What is its tax liability on its final tax return in 2018 if it had $45,000 of income from operations prior to liquidating?

Quizplus · Accepted Answer

When a corporation liquidates, it generally recognizes gain or loss on the assets it distributes to its shareholders. In this case, we need to determine the gain or loss on each asset and then add them together to determine the corporation's total gain or loss on liquidation.

1) Stock - If the stock is sold for its fair market value, there is no gain or loss recognized. Therefore, the corporation has no gain or loss to report on the sale of the stock.

2) Asset 2 - We don't know the nature of this asset, so we can't say for sure whether it will result in a gain or loss. However, let's assume for simplicity that the corporation has a basis of $50,000 in the asset and distributes it to the shareholder for its fair market value of $60,000. In this case, the corporation would recognize a gain of $10,000 ($60,000 - $50,000).

3) Asset 3 - Assuming this asset is not cash, it will need to be sold in order to be distributed to the shareholder. Let's assume that the corporation has a basis of $20,000 in the asset and sells it for $25,000. In this case, the corporation would recognize a gain of $5,000 ($25,000 - $20,000).

To calculate the corporation's total gain or loss on liquidation, we add the gains or losses from each asset:
$0 (stock sale) + $10,000 (Asset 2) + $5,000 (Asset 3) = $15,000

Since the corporation had $45,000 of income from operations prior to liquidating, its total taxable income for the year is $60,000 ($45,000 + $15,000). Using the corporate tax rate table for 2018, the corporation's tax liability would be $5,250 (based on a taxable income of $60,000). Therefore, the correct answer is B.

Casey Corporation Has Three Assets When It Decides to Liquidate