Problem - Noah owns 100% of the stock of CAL INC (a tax C corporation). Noah has a $2 Million tax cost in the stock. CAL INC was incorporated some years ago and capitalized by Noah (meaning Noah funded the corporation with cash in turn for stock). Currently, CAL INC owns two assets: appreciated raw land worth $8 Million with a $2 Million Tax Cost to CAL INC; and $2.2 Million cash ($2,200,000) from selling additional land some time ago. CAL INC has $1 Million long term liabilities (note attached to the land) and has no current liabilities as all paid off due to the upcoming liquidation (detailed below). For this problem, you can assume CAL INC tax rate for any gains equals 35%. For this problem you can assume Noah's of any gains equals 15%.
Noah and his current tax advisor have been talking about tax deal structure. Noah wishes to bring in some partners to develop the land with a new apartment structure. The tax advisor explains the C tax structure is not favorable going forward with new investors coming into the deal. As, Noah's attorney has recommended the limited partnership as a legal entity and then the tax advisor has agreed that tax partnership will work nicely for the deal. They cannot use S as it does not allow the flexibility required for the special allocations they have planned for the deal as Noah wishes to get a special allocation of profits as general partner for structuring the deal. [Note: class this whole paragraph is not required to solve the problem at hand. I am just providing some background information to make the problem more real life].
CAL INC in complete liquidation distributes the assets including the note to Noah in turn for all of Noah's stock. And, CAL INC then cancels all of its stock and goes out of business. Note: you want to complete the Section 336 transaction first. Then, you compute Noah's Section 331 transaction.
You can detail the computation of gain CAL INC realizes and recognizes on the amounts distributed to Noah in complete liquidation. You then can compute the taxes CAL INC owes.
You can detail the computation of taxable gain Noah realizes and recognizes on the amounts received on the distribution of the assets from CAL INC in turn for his stock. The note comes with the land (Noah takes over the $1 Million loan). You then can compute the taxes Noah owes on the distribution. Note: first, you want to evaluate what cash CAL INC has left to transfer to Noah after paying tax on the above transfer.
Question on Tax Basis
What tax basis does Noah now have in the assets transferred to him from CAL INC?
Question on Tax Planning
We may wonder if any more favorable legal entities and corresponding tax entity may have worked better for Noah then forming the Corporation and then defaulting to c tax corporation.
What do you suggest would have a better alternative in deal structure for holding the land at the time Noah formed CAL INC and why?