Rex and Felix are the sole shareholders of Dogs and Cats Corporation (DCC). After several years of operations using the

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Rex and Felix are the sole shareholders of Dogs and CatsCorporation (DCC). After several years of operations using theaccrual method, they decided to liquidate the corporation andoperate the business as a partnership. Rex and Felix hired a lawyerto draw up the legal papers to dissolve the corporation, but theyneed some tax advice from you, their trusted accountant. They arehoping you will find a way for them to liquidate the corporationwhile minimizing their total income tax liability.Rex has a tax basis in his shares of $60,000 and Felix has a taxbasis in his shares of $30,000. DCC’s tax accounting balance sheetat the date of liquidation is as follows:
AdjustedBasis FMV Assets
Cash $52,000 $52,000
Accounts receivable 32,000 32,000
Inventory 32,000 64,000
Equipment 63,000 42,000
Building 32,000 64,000
Land 10,000 76,000
Total assets $221,000 $330,000
Liabilities
Accounts payable $105,000
Mortgage payable—Building 50,000
Mortgage payable—Land 50,000
Total liabilities $205,000
Shareholders’Equity
Common stock—Rex (80%) $100,000
Common stock—Felix (20%) 25,000
Total shareholders equity $125,000