Let's break down the problem step-by-step and provide a summary at the end. ## Given: - Newman Corporation owns **90 shares** (90%) of SP Corporation. - Kenny owns **10 shares** (10%) of SP Corporation. - The **tax basis** of Newman's shares: **$10,000** - The **tax basis** of Kenny's shares: **$7,000** - SP's reported balance sheet at liquidation: | Asset | Adjusted Tax Basis | FMV | |----------------------|-------------------|----------| | Cash | $12,000 | $12,000 | | Accounts receivable | $8,000 | $8,000 | | Stock investment | $2,000 | $10,000 | | Land | $40,000 | $70,000 | | **Total assets** | $62,000 | $100,000 | | Common stock—Newman | $55,800 | $90,000 | | Common stock—Kenny | $6,200 | $10,000 | | **Total equity** | $62,000 | $100,000 | --- ## (a) **Gain or loss recognized when SP distributes $10,000 cash to Kenny and remaining assets to Newman** ### 1. **SP Corporation's Gain or Loss** - **Liquidation is generally a taxable event** for C corporations. - SP will recognize gain/loss as if it sold the assets at FMV. - **Cash**: No gain/loss (FMV = basis) - **Accounts receivable**: No gain/loss (FMV = basis) - **Stock investment**: Gain = $10,000 (FMV) - $2,000 (basis) = **$8,000** - **Land**: Gain = $70,000 (FMV) - $40,000 (basis) = **$30,000** **Total gain recognized by SP:** $8,000 (stock) + $30,000 (land) = **$38,000** --- ### 2. **Distribution to Shareholders** - Kenny receives $10,000 cash (for his 10% interest) - Newman receives the remaining assets ($90,000 FMV, for his 90% interest) #### Kenny: - Amount received: $10,000 - Basis: $7,000 - **Gain:** $10,000 - $7,000 = **$3,000** #### Newman: - Amount received: $90,000 - Basis: $10,000 - **Gain:** $90,000 - $10,000 = **$80,000** --- ## (b) **SP distributes the stock investment to Kenny and remaining assets to Newman** - Kenny gets stock investment (FMV $10,000) for 10% interest. - Newman gets remaining assets (FMV $90,000) for 90% interest. #### Kenny: - Amount received: $10,000 (stock investment, FMV) - Basis: $7,000 - **Gain:** $10,000 - $7,000 = **$3,000** #### Newman: - Amount received: $90,000 (other assets, FMV) - Basis: $10,000 - **Gain:** $90,000 - $10,000 = **$80,000** --- ## (c) **Form to be filed** - **IRS Form 966** ("Corporate Dissolution or Liquidation") must be filed by the corporation within 30 days of the adoption of the resolution or plan to dissolve or liquidate. --- ## **Final Summary Table** | Party | Gain/Loss (a) | Gain/Loss (b) | Tax Form | |--------------|-------------------------|-------------------------|-------------| | **SP Corp** | $38,000 gain | $38,000 gain | Form 966 | | **Kenny** | $3,000 gain | $3,000 gain | | | **Newman** | $80,000 gain | $80,000 gain | | **Summary:** On liquidation, SP recognizes a total gain of $38,000. Kenny recognizes a gain of $3,000 and Newman recognizes a gain of $80,000, regardless of whether Kenny receives cash or the stock investment. SP must file IRS Form 966 for the liquidation.