Gain Calculation and Tax Liability to Mason

A realized gain is represented by the amount of the gain, whether it

can be taxable or not. The amount that is taxable is called a recognized gain.
The calculation is as follows: Amount Realized Adjusted Basis. Masons gain
on this transaction is:
Mason receives $1,550,000 in consideration from JIM of $750,000 in cash and
$800,000 in JIM common stock. Therefore the realized gain is $1,550,000 $995,000, equal to adjusted basis of Masons assets = $555,000. Thus, no
gain is recognized due to all consideration is passed down to the
shareholders. Then, tax liability at Masons corporation level is $0 since the
company is liquidated per state law and no longer exists, so consideration is
passed down to the shareholders.
Gain Calculation
As mentioned, realized gain is the amount of the gain. The calculation
for determining the realized gain is:
Amount Realized Adjusted Basis. The realized gain for Mason
shareholders is: $750,000 (cash) + $800,000 (JIM common stock) - $600,000
(Mason shareholder basis in stock) = realized gain of $950,000. The amount
that the Mason shareholders will recognize on this transfer is the lower of the
$950,000 (realized gain) or $750,000 (amount of boot received). In this case

the amount recognized is $750,000. Or it should understood that the fact

that boot is immediately taxable regardless.

Tax Liability to Mason Shareholders

Mason shareholders will incur a tax liability of $150,000 which is
calculated by taking the $750,000 recognized gain and multiplying it by the
capital gain rate of 20%. As far as the tax effects for JIM, there is no tax
effect to JIM shareholders as JIM is the acquiring company and only stock and
cash are part of the transfer. JIM will also take a carryover basis in the assets
of Mason.