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Jane Mario and Ronald each own 100 of the 300 outstanding sh

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corporation in a transaction that qualifies for non recognition under Code Section 351. Mario transferred Property A, which had a tax basis of $150,000 and a fair market value of $80,000 at the time it was transferred. During the time Crafty held Property A, its fair market value declined to $40,000. On May 20, 2017 Crafty Corporation adopted a plan of liquidation. Two days later, as part of this plan, Property A was distributed to Ronald.
a. Explain the tax consequences of this distribution for the corporation.
b. Suppose that Ronald purchases 75 of Jane’s shares in 2016. What would be the tax consequences of the distribution?

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corporation in a transaction that qualifies for non recognition under Code Section 351. Mario transferred Property A, which had a tax basis of $150,000 and a fair market value of $80,000 at the time it was transferred. During the time Crafty held Property A, its fair market value declined to $40,000. On May 20, 2017 Crafty Corporation adopted a plan of liquidation. Two days later, as part of this plan, Property A was distributed to Ronald.
a. Explain the tax consequences of this distribution for the corporation.
b. Suppose that Ronald purchases 75 of Jane’s shares in 2016. What would be the tax consequences of the distribution?

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corporation in a transaction that qualifies for non recognition under Code Section 351. Mario transferred Property A, which had a tax basis of $150,000 and a fair market value of $80,000 at the time it was transferred. During the time Crafty held Property A, its fair market value declined to $40,000. On May 20, 2017 Crafty Corporation adopted a plan of liquidation. Two days later, as part of this plan, Property A was distributed to Ronald.
a. Explain the tax consequences of this distribution for the corporation.
b. Suppose that Ronald purchases 75 of Jane’s shares in 2016. What would be the tax consequences of the distribution?

Solution

ANS :- a

Normally transferor of a capital asset is liable to pay capital gain tax because he receives
consideration on transfer of capital asset by way of sale, exchange etc. If the consideration is more
than the cost of acquisition and cost of improvement of asset and expenses incurred in connection
with the transfer, then such excess is included as capital gains, in the gross total income of the
transferor.

Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.

hence whatever the assets transfer by corporation to its share holder on liquidation would not be attaracted for any tax consequences (capital gain)

Ans :- B

Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend with in the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48.

Computation :
Money received + Market value of the asset – Deemed dividend u/s 2(22)(c) = Sale Consideration of the shares in the liquidating company

In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation should be excluded.

Since the dividend is exempt in the hands of shareholders the company is liable to pay dividend distribution tax @ 15% + 10% surcharge + 2% education cess u/s 115O.

as now calculation of ronald tax on distribution.

ronald purchase 75 of jane\'s share in 2016 hence at the time of distribution ronald hold the total 175 share out of 300 share hence taxblity would be charge on such 175 share which hold 58.33 % right.

i.e 40000*58.33% =23332 (tax on this amount .)

Where the asset other than cash acquired by the shareholder on the liquidation of the company is subsequently transferred, in this case cost of acquisition of the assets shall be the fair market value of the asset on the date of distribution . No other adjustment like deemed dividend shall be made.

Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corpor
Jane, Mario, and Ronald each own 100 of the 300 outstanding shares in the Crafty Corporation. On August 30, 2015, each of them transfers property to the corpor

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