Wheeler Electrical Supplies, Inc. (Wheeler), an accrual basis, calendar year C corporation, has been in the business of manufacturing small electrical components in Texas since 1993. Until recently, four individuals, Brian and Ashley Clay and their daughters Angela and Kristin, owned an equal number of shares in Wheeler. The four individuals were all original shareholders, and the stock issued to them upon Wheeler's incorporation qualified as §1244 stock. Principally because of depressed economic conditions in the region, the business has operated at a loss for the past several years. Three of the shareholders wanted to sell the corporation. However, Angela Clay is convinced that she can make the business profitable again if she is in sole control of operations. Based on this conviction, Angela purchased the 300 outstanding shares of the other family members in 2006 for a nominal price of $1,000. Her basis in her original 100 shares is $5,000.
Angela believes that Wheeler has some amount of negative goodwill attributable to adverse publicity concerning certain corporate business practices. Indeed, Angela is concerned that certain hazardous waste disposal practices of the corporation could subject Wheeler and the principal shareholders to personal liability that she fears could reach thousands of dollars. She also would prefer to pay tax on future business profits at her individual tax rate, rather than the higher corporate rate. Finally, she sees no reason to continue to pay the annual Texas corporate franchise tax (Texas has no individual income tax). Therefore, she is contemplating a liquidation of Wheeler, after which she will reorganize the business as a sole proprietorship. While Angela has concluded that she should liquidate Wheeler as a corporation, she remains concerned about operating as a sole proprietorship in light of potential liability for matters such as product liability claims.
Because the business is currently insolvent, Angela has negotiated with the holder of an $80,000 corporate note to transfer the business accounts receivable to the holder in full satisfaction of the debt. Then the corporation will distribute its remaining assets to Angela, who will assume personal responsibility for the accounts payable. Although the fair market value of the corporate real property (plant and land) is less than the principal balance of the mortgage, Angela wants to retain the real property in the business because of the advantageous location of the property and its particular suitability for the manufacturing processes involved in the business. The mortgage holder has agreed to allow Wheeler to distribute the real property to Angela, subject to the existing mortgage, as long as Angela will assume personal liability for the repayment of the mortgage.
A projected July 31, 2009 balance sheet for Wheeler is attached. Corporate operations through July 31, 2009 are expected to generate a $47,000 current loss. The corporate net operating loss carryforward into 2009 is $82,000. Assuming that Angela follows through with her plans and liquidates the corporation on July 31, 2009, calculate Wheeler's 2009 corporate income tax liability, and explain any assumptions used in making the calculation.
Wheeler Electrical Supplies, Inc.
Projected Balance Sheet
July 31, 2009
Tax Basis Fair Market Value
Cash $ 2,000 $ 2,000
Trade accounts receivable 45,000 42,000
Inventory 30,000 48,000
Furniture and equipment 200,000 80,000
acc. depr. (120,000) -0-
Plant 450,000 230,000
acc. depr. (320,000) -0-
Land 175,000 150,000
Liabilities and Shareholders' Equity
Trade accounts payable $20,000
Note payable 80,000
Mortgage on plant
and land (recourse) 500,000
Paid-in capital 20,000
Retained earnings (158,000)
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