Tax Consequences of Liquidation in Black Corporation

When Black Corporation decides to liquidate and distribute its assets to shareholders, the amount and nature of gain or loss recognized is based on the difference between the fair market value (FMV) of the assets distributed and the corporation's adjusted basis in those assets. This recognized gain or loss is typically a capital gain or loss for tax purposes. For shareholders Sam and Susan, they must recognize a gain or loss on the liquidation of their stock in Black Corporation, which is the difference between the FMV of the assets received and their adjusted basis in the Black Corporation stock.

Scenario 1: Cash and Inventory to Sam, Equipment to Susan

If Black Corporation distributes the cash and inventory to Sam and the equipment to Susan, the corporation must recognize a gain or loss based on the FMV of the cash, inventory, and equipment at the time of distribution. Sam would recognize a gain or loss based on the difference between the FMV of the cash and inventory received, and his adjusted basis in the 80% Black Corporation stock. Similarly, Susan would recognize a gain or loss, comparing the FMV of the equipment received to her adjusted basis in the 20% stock.

Scenario 2: Cash and Equipment to Sam, Inventory to Susan

If Black Corporation distributes the cash and equipment to Sam and the inventory to Susan, the gains or losses recognized by the corporation and the shareholders would be recalculated based on the new distribution of assets. Black Corporation must recognize a gain or loss on liquidation based on the FMV of assets distributed. Shareholders Sam and Susan recognize a gain or loss based on the FMV of assets received and their adjusted basis in the corporation's stock.

Regardless of the distribution of assets, Black Corporation and its shareholders must calculate gains or losses based on the fair market value of the assets receiving during liquidation. Any changes in the distribution would require a recalculation of the tax consequences.