Reference no: EM132669702

Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. They are hoping you will find a way for them to liquidate the corporation while minimizing their total income tax liability.

Rex has a tax basis in his shares of $76,000 and Felix has a tax basis in his shares of $46,000. DCC's tax accounting balance sheet at the date of liquidation is as follows:

Assets:                Adjusted Basis                  FMV
Cash                  46,000                          46,000
A/R                    26,000                        26,000
Inventory            26,000                        36,000
Equipment            46,000                       36,000
Building                31,000                      46,000
Land                    21,000                       56,000
Total Assets         196,000                     246,000

Liabilities

A/P 21,000
Mortgage - Building 26,000
Mortgage - Land 26,000
Total Liabilities 73,000

Shareholder's Equity

C/S - Rex (80%) 138,400
C/S - Felix (20%) 34,600
total S/E 173,000

Problem 1: Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming each shareholder receives a pro rata distribution of the corporation's assets and assumes a pro rata amount of the liabilities.

Problem 2: Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming Felix receives his share in cash and Rex receives the remainder of the assets and assumes all of the liabilities.

Problem 3: Will Felix recognize any income when he collects the accounts receivable?