Let's now apply the shareholder level complete liquidation rules to Sunchaser Shakery.

Nicholas own two lots of Sunchaser Shakery Corporation stock,

representing a combined 10 percent interest.

In January of year one,

he had bought 300 shares for $20,000.

And in August of year two,

he bought 200 shares for $32,500.

In a complete liquidation,

Nicholas received a $75,000 cash

distribution at the end of year two in exchange for all of his shares.

Sunchaser had $620,000 of E&P before the distribution,

and we want to know what are the tax effects of the distribution for Nicholas.

So recall that section 3-31,

provides capital gain or loss treatment for distributions received

by a shareholder and complete liquidation of a corporation.

The holding period, of course,

depends on the length of time that the stock was held.

So, if we look at the total amount that Nicholas receives in this liquidation,

divided by the number of shares that he holds, in total 500.

We see that he is in effect receiving $150 per share of stock.

So, in looking at his lot number one of shares of stock, 300.

He's receiving $150 per share.

In other words, his amount realized for these shares of stock is $45,000.

And we were told his basis in the shares in total was 20,000.

That's for lot one, he has a $25,000 long term

capital gain because this takes place in year two.

For his second lot of shares, 200,

he's again deemed to be receiving $150 per share.

Giving him an amount realized in this case of $30000.

And we're told his basis and this lot of shares was $32,500,

which results in a loss of 2,500.

And this is a short term capital loss,

because he has held these shares less than one year.

So overall, the effects here are a $25,000 long term

capital gain and a $2,500 short term capital loss.

Nicholas owned 100 shares of stock in Sunchaser Shakery Corporation.

During the current year, Sunchaser completely liquidated and

distributed the following to Nicholas: $40,000 cash;

land worth $600,000 subject to a $300,000 mortgage.

Nicholas's basis in Sunchaser's stock was $30,000 and he will assume the mortgage.

What does Nicolas's basis in the land received?

Recall that section 3-34 provides that,

if property is received and complete liquidation and if

gain or loss is recognized on the receipt of that property,

the basis of the property in the distributor hands will be

the fair market value of the property at the time of the distribution.

So, let's determine if Nicholas will recognize a gain or loss on the transaction,

and then we can determine the basis.

So, the fair market value of the land that he

receives as part of his amount realized is $600,000.

He also received some cash, $40,000.

And he will assume the liability of $300,000.

Subtract from this is adjusted basis, 30,000.

And we see that there is a $310,000 gain on the transaction.

So because he recognizes a gain,

section 3-34 will apply.

And his basis in the land will be the fair market value and distribution.

Or in other words $600,000.

Lesson 7.4.2 Shareholder Tax Effects: Applications

Taxation of Business Entities I: Corporations

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