A C corporation distributes assets in a complete liquidation. The assets have a basis of $100,000 and FMV of $150,000. The shareholder has a stock basis of $80,000. What are the tax consequences?

Answer options:

Corporation recognizes no gain; Shareholder recognizes $70,000 gain.

Corporation recognizes $50,000 gain; Shareholder recognizes no gain.

Corporation recognizes $50,000 gain; Shareholder recognizes $70,000 gain.

Corporation recognizes $50,000 gain; Shareholder recognizes $20,000 gain.

How to approach this question

Liquidation = Double Tax. 1. Corp sells assets (FMV - Basis). 2. Shareholder sells stock (FMV received - Stock Basis).

Full Answer

C.Corporation recognizes $50,000 gain; Shareholder recognizes $70,000 gain.✓ Correct

In a complete liquidation, the corporation recognizes gain as if assets were sold at FMV ($150,000 - $100,000 = $50,000). The shareholder treats the property received as full payment for the stock ($150,000 - $80,000 = $70,000 gain).

Common mistakes

Forgetting the corporate level tax.

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