 Oh, and welcome to the session in which we would look at a task-based simulations on the CPA exam that deals with a liquidating distribution to 10% owner. What's interesting about this scenario is the fact that it's going to speak to four different company structure. C court, S court, general partnership and limited partnership. It's also going to involve that as well. So it's very important that you have a good understanding about this simulation. So this is a liquidating distribution to 10% owner. Before we start, I would like to remind you that if you are a CPA candidate or an accounting students for that matter, I strongly suggest you check out my website farhatlectures.com. I don't replace your better Roger, Gleam, Wiley or any other CPA review course. I wish I can. I can't. But what I can do is I can be a useful addition to your CPA review course. I can add 10 to 15 points to your CPA exam by explaining the material as you have learned it in college. 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What I'm going to do, I'm going to take this problem and use an Excel sheet because it's much easier to use it in an Excel sheet because I can use formulas. It's easier for you to follow. So here's the Excel sheet. So we have a company, Maggie company had a 10% owner distribution. The pre-distribution basis is $30,000. The asset distributed was a piece of land that's held as an investment, a fair market value of $30,000. The adjusted basis for the company itself is $15,000. That's what we have so far. We have liabilities, non-recourse debt. We have a non-recourse debt and recourse debt and total liabilities of $50,000. Then they're asking us to compute the total gain or loss recognized by the company. Total gain or loss recognized by Adam the shareholder and the Adam basis and the asset distributed because we have Adam as a 10% shareholder in this company. So let's go ahead and start to solve this problem. Now, let me tell you this. If you really know the rules, this simulation, it looks like it's a lot of work. But once you know the rules, it's not really a lot of work. So I'm going to try to give you the shortcuts, but this is not how I usually teach, but this is what I want. I want to give you the shortcut to know exactly how to solve this problem. Obviously, I have a lot of time explaining, I have a lot of lectures explaining distribution for C, S, so on and so forth on four half lectures within my lessons. But on the exam, you want to remember those quick rules that's going to help you solve the problem. First, what is the total gain or loss recognized by the company itself? So when you're looking at gain or loss, remember the company as the company distribute the asset as if they have sold it. As if they have sold it. So here's what they have. They have an asset with a fair market value of 27 adjusted basis of 15. So if they sold it simply put, they're going to have a gain of 12,000. So as far as the corporation is concerned, whether it's a C or an S, we're done. This is all what it takes. It is the fair market value minus the adjusted basis. Again, the logic behind this, not the logic. Actually it is the logic. The logic behind it is think about it from a logical perspective. Again, I'm keep repeating the word logic is they would have, if they wanted to give you the cash, if they wanted to give you $27,000 in cash, they would have sold it, right? And they gave you $27,000. Therefore, as far as the company is concerned, they sold it, then they gave you the money. Therefore, if they sold it, they have to recognize a gain and that gain is $12,000. Again, whether that is a C or an S, the gain is $12,000. So easy peasy here. You should plug in $12,000 immediately. Give me one second to show you the figure here. And $12,000 it is and $12,000 for the C and for the S. So this should be fairly quickly. This should be done fairly quickly. Also, let's keep going for the partnership. You need to know that when a partnership distributes an asset to its partner or member, they don't recognize a gain or a loss. Therefore, easy. It's a zero. You don't have to think about it. There is zero. So that's also, we already finished one-third of the simulation with basic or minimum computation. You just finished one-third of it. Now we need to discuss this from the total gain or loss recognized by Adam. Who's Adam? Adam is the 10% owner. 10% not owner. Yeah, the 10% owner that's getting this asset. Well, let's take a look at Adam. Adam has a basis of $30,000. If we're looking at C corporation, think of when you buy stocks in Tesla or Walmart or PepsiCo or any other company in the real world or Amazon. What you do is you pay a price and that's your basis. And when they give you something, when they distribute something to you, they distribute something worth of $27,000, you invested $30,000. Guess what? You are at a loss. You are at a loss. You invested $30,000. They gave you $27,000. Simply put, for a C corp, it should be straightforward in my opinion too. And you have a loss of $3,000 and that's the difference between what you paid $30,000 and your fair market value you received. Simply put, you gave them $30,000. They gave you $27,000 back. You are at a loss. Let's discuss the distribution for the S corporation now. For the S corporation, remember, the basis could change. So therefore, we are starting with $30,000. Remember, you have to know why the basis go up and down as well for the exam. Now, when we distribute this piece of land as an investment, remember the company itself recognized 12,000 of gains. We already determined this. Now, as far as the basis for Adam, Adam's basis will increase by 10% because that's again 1,200. Therefore, the basis for Adam is $31,200. Okay? That's the basis, the adjusted basis after the distribution. Now, we're going to compare this adjusted basis to the fair market value. So our basis are $31,200. The adjusted basis is, I'm not sorry, the fair market value is $27,000. So let's do this. So if we take $31,200, we're going to take $31,200 minus $27,000. And you're going to think we have a loss, basically this is a loss because our adjusted basis are higher. Because remember, we have a basis of $31,200. They gave us something for $27,000. Now, the only thing you have to be aware of and be careful is the total gain or loss. Remember, although they have a loss on the distribution, remember, they're going to get $1,200 reported from the gain. Remember, this gain was $12,000. Adam will get $1,200 as a gain. Therefore, the gain will be $1,200, $1,000 plus $1,200. And the net loss will be also $3,000. So simply put, it's $30,000 plus $1,200 increase in the basis. Then we have the gain to adjust this, not adjust, but the gain to report. Therefore, the net is also $30,000. Once again, we have first a loss of $4,200 because our basis went up by $1,200. Be careful. Be careful. For the S-Corp, when we distributed, we have a gain. We adjust the basis before we compute the total gain or loss. Not $30,000, $3,000. So negative $3,000. Now, let's compute the total gain or loss recognized by Adam the shareholder. Well, if it's not cash, that's easy. There is no gain, no loss. Therefore, also, as long as we know the rules, we can answer those questions correctly. So notice, we did not really do a lot of computation. As long as we know the rules, we can go through this fairly quickly. Now, we're going to be looking at the last issue that we have to deal with is Adam's basis in the asset distributed. What does that mean? It means when Adam takes the basis, what basis are they going to record on their books? Because they gave them the asset. The asset has a fair market value of $27,000 and the adjusted basis of $15,000. So let's start with a C-court. What do we do with a C-court? For a C-court, well, they distribute the fair market value. Again, think as if they sold this asset for $27,000 and they gave you $27,000. Therefore, the basis is at fair market value, which is $27,000. Whether it's a C or an S, you would receive the basis of $27,000. From a partnership perspective, they have a pre-distribution basis of $30,000. Now, when we liquidate, simply put, we're going to have to eliminate this account, bring it down to zero. And we're going to give them an asset, which is the land. Now, remember, when a partnership leaves the partnership, when we look at their basis, including in this basis, is their liability portion. What is a liability portion? The total liability for this company is $50,000. This is a general partnership. Therefore, we assume this individual is a general partner. We assume it's a general partnership. It means everybody is a general partner. Well, in this $30,000, Adam has 10%, which is $5,000. Well, what does that mean? It means we have to reduce this $30,000, because simply put, as if we relieve them $5,000 of their liability, therefore, they have to reduce their basis by $5,000. Therefore, the basis is $25,000. Now, they're receiving something that's worth, sorry, their basis, adjusted basis is $25,000. They're receiving something that's worth $27,000. It doesn't matter what they're receiving. If their basis is $25,000, therefore, the basis and the property distributed is also $25,000. Simply put, we're going to take $30,000 minus 10% of $50,000, which is $5,000, which will give us a basis of $25,000. That's that. Now, let's take a look at a limited liability scenario. Well, what is the difference between limited liability and a general partnership is the debt. Now, we're only responsible. We're going to relieve them from the non-recourse debt. So the only thing that's included in this $30,000 is the non-recourse debt. Simply put, what does that mean? It means we have $30,000, and when we remove them, when we remove them, we're going to have to reduce because they're getting rid of their liability, including in this $30,000. The portion of their liability, $40,000 times 10% equal to $4,000 minus $4,000, which will give us adjusted basis of $26,000. Although they're giving them an asset of $27,000, we only recorded at $26,000. Simply put, they have a gain that's going to be the third for later. That's all what's happening here. Therefore, what we do is the answer is $26,000. Again, why $26,000? It's $30,000 minus 10% of $40,000, which is the amount of the debt that's included in this limited liability. Simply put, okay, let's assume we gave them the full $27,000. It means what happened is we increased their basis by $1,000. So when they sell this asset later, they're going to have $1,000 less of gains. Here, what we do is we say, no, your basis worth $26,000, and we gave you something worth more than $26,000. You would record your basis at $26,000. So when you sell it, your basis are lower. Your basis are lower. It means in the future, your gain is higher. All we're doing is we're deferring your gain for later. That's all we're doing, okay? And hopefully, if you can follow this and understand it, not only follow it, if you understand this, let's do a quick recap just real quick. First, for the corporation, simply put, it's the asset basis versus fair market value. Notice it's the distribution at fair market value, $27,000 minus $15,000 for the corporation gains. For the partnership, we have no gain and we don't report gains unless there's cash. We don't have cash in here, so there's no gain. For the, we don't report, sorry, we don't report gain. Simply put, we don't report gain here. For the shareholder, gain or loss recognized by the shareholder, simply put, we're going to have to take what their basis is for the C minus what they got. They invested $30,000, they got $27,000, they have a losses of $3,000. For the ascorp, they have $3,000, but it's computed differently. First, we took the $30,000, add it to it, the $1,200, then when we computed the loss, the loss was, the net loss is, the net loss was $4,200 because we have a basis of $31,200 compared to $27,000. We have a loss of $4,200, then we add the gain that the shareholder received. Therefore, the net is lost $3,000. Again, the shareholder, no reported gain because they would have not distributed cash. The Adams basis and the distributed asset for the C corporation, it's fair market value, for the S corporation is the fair market value, same thing, fair market value. For the partnership, we had to remember to reduce the $30,000 by the amount of the debt relief for the total and the reason we did the total because this is a general partnership. Remember, general partnership. Let me highlight this. This is a, let me see if I can highlight only, yeah, I can only highlight the general partnership. Remember, this is a general partnership. Therefore, you are responsible for all the debt, which is if you leave, kind of basically we gave you $5,000, which is 10% of $50,000 because that's your ownership. For the LLC, you're only non-recourse debt secured by the building, we reduce it by $4,000. At the end of this recording, I would like to remind you, if you are studying for the CPA exam, if you're a CPA candidate, I strongly suggest you check out my website, farhatlectures.com. Again, I don't replace your CPA review course. I will try to explain the material in a different way. The supplement give you another alternative to help you understand the material. Study hard and stay safe most importantly.