Madeleine owns 100% of Omega Corporation's common stock. Omega is an accrual basis,

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Madeleine owns 100% of Omega Corporation's common stock. Omega is an accrual basis, calendar year corporation. Madeleine formed the corporation six years ago by transferring $200,000 of cash in exchange for the Omega stock. Thus, she has held the stock for six years and has a $200,000 adjusted basis in the stock.

Omega's balance sheet at January 1 of the current year is as follows:

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Omega has held the marketable securities for two years.

In addition, Omega has claimed $110,000 of MACRS depreciation on the machinery and $160,000

of straight-line depreciation on the building. On January 2 of the current year, Omega liquidates and distributes all property to Madeleine except that Omega retains cash to pay the accounts payable and any tax liability resulting from Omega's liquidation. Assume that Omega has no other taxable income or loss.

Requirement

Determine the tax consequences to Omega and Madeleine. Assume a 34% corporate tax rate.

Let's begin by determining the tax consequences for Omega. Select the property needed to compute

Omega's total gain or loss, compute the gain or loss for each asset and determine the character for each gain or loss. Then, compute Omega's total gain or loss and compute Omega's tax liability.

 
 
 
Gain or loss recognized
 
 
 
Amount
Character
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Total
 
 
 
 
 
Times: Tax rate
 
 
%
 
 
Tax liability
 
 
 
 
Next, determine the gain or loss for

Madeleine.

Select the formula then enter the amounts and compute the gain or loss recognized.

 
-
 
=
Gain (loss) recognized
 

 
-
 
=
 
Select the property distributed to

Madeleine

and enter her basis for each property received.

Property received
Basis
 
 
 
 
 
 
 
 
 
 
 
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