August 25mgmt127b

August 25mgmt127b - $ S/H MGMT 127B Complete Liquidation or Shut Down With a complete liquidation or shutdown the corporation sells off property or

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S/H Property Corp $ S/H Property Corp Parent Corp. CORP Basis: $3 FMV: $10 Google $1 Billion $1 billion As if they paid $1 billion Acq Google Basis: 3 FMV: 10 CORP YouTube Inside Basis Shareholder 10% $60 of income Income: $6 S/H n Stock: ution of $10 + Income of $6 = $16 = $5 received = $11 August 25, 2008 MGMT 127B Complete Liquidation or Shut Down With a complete liquidation or shutdown, the corporation sells off property or hands off property in kind to the owners.
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If we sell property a double tax exists. At the corporate level, a sale has taken place on an appreciated asset, and therefore, the corporation will pay tax. When the proceeds are handed out to shareholders, a second tax occurs, this time on the individual level. When we liquidate, instead of selling the property, why don’t we directly hand the property to the shareholder?
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From a practical standpoint, this is very difficult because we don’t want you to avoid the double tax. Example You have assets worth $100 and a basis of $27. If it were sold, the corporation would have a gain of $73. When a company distributes property that has appreciated, it is taxed on the appreciation as if it had sold it to make sure that the corporate level tax gets paid. If it distributes property at a loss, then the loss would be recognized at the corporate level as well. When the company distributes property with a basis of $27 and a FMV of $100, it will recognize a gain of $73. Say that the shareholder has basis in the property of $10. When $100 of property is distributed to the shareholder, they recognize the gain in excess of their cost. Therefore, the shareholder would recognize a gain of $90 ($100 of gain less $10 of cost). The $90 of gain recognized by the shareholder would be treated as a capital gain. The above case demonstrates the general rules of complete liquidations. However an exception exists. What if a corporation isn’t distributing property to people, but to other corporations?
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This note was uploaded on 10/02/2008 for the course MGMT 127B taught by Professor Klein during the Summer '08 term at UCLA.

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August 25mgmt127b - $ S/H MGMT 127B Complete Liquidation or Shut Down With a complete liquidation or shutdown the corporation sells off property or

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