John Ralph owns The Ralph Construction Company (RCC), a C corporation
with a September 30, year end. For ten years RCC constructed
special-purpose buildings and reported revenues on the
percentage-of-completion method.
John also owns Construction Equipment, Inc. (CE). CE is a calendar year
S corporation that rents and leases construction equipment to
contractors. Typically 25% of CE’s revenue have been from RCC. CE uses
the accrual basis of accounting.
On September 30th of Year 10, RCC’s tax-basis balance sheet:
Assets
Current Assets
Cash
$2,502,826
Certificates of deposit
125,949
Investment Securities
2,197,287
Accounts receivable net
254,250
Prepaid expenses & other current assets
26,100
Total Current Assets
5,106,412
Property & Equipment $1,262,732
Less: Accumulated Deprec. 723,496
539,236
$5,645,648
Liabilities & Stockholder's Equity
Current Liabilities
Accounts Payable
$819,390
Accrued expenses
172,066
Total Current Liabilities
$991,456
Stockholder's Equity
Common stock
500
Paid-in capital
77,413
Retained earnings
4,576,279
$5,645,648
The fair market value of the investment securities is about $4 million.
The value of the equipment is about $2 million. In the past, RCC has
maintained, for purposes of the Accumulated Earnings Tax that it needs a
reserve of at least $ 4 million dollars to prepare for the purchase of
new equipment.
On December 31 of Year 10, Construction Equipment’s tax-basis balance
sheet showed:
Assets
Current Assets
Cash
$1,397,848
Accounts receivable net
525,000
Total Current Assets
1,922,848
Property & Equipment $1,385,984
Less: Accumulated Deprec. -423,439
962,545
$2,885,393
Liabilities & Stockholder's Equity
Current Liabilities
Accounts Payable
$86,982
Accrued expenses
2,091
Total Current Liabilities
$89,073
Stockholder's Equity
Common stock
500
Paid-in capital
25,893
Retained earnings
2,769,927
$2,885,393
The equipment of this company has a FMV of about $800,000.
Situation
In February, Mr. Ralph sold all the fixed assets owned by both companies
to an unrelated third party for FMV and moved to Alaska. He doesn’t
know what he should do with either company now.
Explain the issues Mr. Ralph and his companies would face if he did
nothing and continued to hold the remaining assets where they are.
Explain the tax ramifications to both Mr. Ralph and his companies if he
were to liquidate both companies immediately.
Suggest two alternative courses of action. Explain why these options are
better than doing nothing or liquidating immediately. Evaluate the pros
and cons of each suggestion.
Provide at least one example of an estate planning issue that might make
it more beneficial to liquidate the companies at some point.
Make a final recommendation.
Business Homework Solutions
#75851
John Ralph's Corporations: liquidation issues, estate planning
See attached file for full problem description.
---
John Ralph owns The Ralph Construction Company (RCC), a C corporation with a September 30, year end. For ten years RCC constructed special-purpose buildings and reported revenues on the percentage-of-completion method.
John also owns Construction Equipment, Inc. (CE). CE is a calendar year S corporation that rents and leases construction equipment to contractors. Typically 25% of CE's revenue have been from RCC. CE uses the accrual basis of accounting.
On September 30th of Year 10, RCC's tax-basis balance sheet:
Assets
Current Assets
Cash $2,502,826
Certificates of deposit 125,949
Investment Securities 2,197,287
Accounts receivable net 254,250
Prepaid expenses & other current assets 26,100
Total Current Assets 5,106,412
Property & Equipment $1,262,732
Less: Accumulated Deprec. 723,496
539,236
$5,645,648
Liabilities & Stockholder's Equity
Current Liabilities
Accounts Payable $819,390
Accrued expenses 172,066
Total Current Liabilities $991,456
Stockholder's Equity
Common stock 500
Paid-in capital 77,413
Retained earnings 4,576,279
$5,645,648
The fair market value of the investment securities is about $4 million. The value of the equipment is about $2 million. In the past, RCC has maintained, for purposes of the Accumulated Earnings Tax that it needs a reserve of at least $ 4 million dollars to prepare for the purchase of new equipment.
On December 31 of Year 10, Construction Equipment's tax-basis balance sheet showed:
Assets
Current Assets
Cash $1,397,848
Accounts receivable net 525,000
Total Current Assets 1,922,848
Property & Equipment $1,385,984
Less: Accumulated Deprec. -423,439
962,545
$2,885,393
Liabilities & Stockholder's Equity
Current Liabilities
Accounts Payable $86,982
Accrued expenses 2,091
Total Current Liabilities $89,073
Stockholder's Equity
Common stock 500
Paid-in capital 25,893
Retained earnings 2,769,927
$2,885,393
The equipment of this company has a FMV of about $800,000.
Situation
In February, Mr. Ralph sold all the fixed assets owned by both companies to an unrelated third party for FMV and moved to Alaska. He doesn't know what he should do with either company now.
1. Explain the issues Mr. Ralph and his companies would face if he did nothing and continued to hold the remaining assets where they are.
2. Explain the tax ramifications to both Mr. Ralph and his companies if he were to liquidate both companies immediately.
3. Suggest two alternative courses of action. Explain why these options are better than doing nothing or liquidating immediately. Evaluate the pros and cons of each suggestion.
4. Provide at least one example of an estate planning issue that might make it more beneficial to liquidate the companies at some point.
5. Make a final recommendation.
In a 2400 word solution, the response is very detailed in the application of tax law. Code Sections are cited frequently to explain complex tax concepts regarding corporations under Sub chapter C and S. There are calculations and comparison to demonstrate various options about built in gains and accumulated earnings tax in liquidation and more.
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