ExpertHard1 markMultiple Choice
CPA · Question 46 · Area V: Entity Taxation
A C Corporation distributes assets in a complete liquidation. The assets have a basis of $100,000 and FMV of $300,000. The corporation has a $50,000 liability on the assets, which the shareholder assumes. What is the gain recognized by the corporation?
A C Corporation distributes assets in a complete liquidation. The assets have a basis of $100,000 and FMV of $300,000. The corporation has a $50,000 liability on the assets, which the shareholder assumes. What is the gain recognized by the corporation?
Answer options:
A.
$150,000
B.
$0
C.
$200,000
D.
$250,000
How to approach this question
Liquidation Rule: Corp treats it as a sale at FMV. Gain = FMV - Basis. The liability assumed by the shareholder does NOT reduce the FMV for the gain calculation (unless Liability > FMV).
Full Answer
C.$200,000✓ Correct
C
Under IRC §336, a liquidating corporation recognizes gain or loss as if the property were sold to the distributee at its fair market value. Gain = $300,000 (FMV) - $100,000 (Basis) = $200,000. The liability assumption affects the shareholder's basis/gain, not the corporation's gain (unless liability > FMV).
Common mistakes
Reducing the corporate gain by the liability assumed.
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