A C Corporation distributes an asset (FMV 0,000, Basis ,000) to its sole shareholder in a complete liquidation. The shareholder's basis in the stock is ,000. What are the tax consequences?

Answer options:

Corp recognizes 0 gain; Shareholder recognizes ,000 gain.

Corp recognizes ,000 gain; Shareholder recognizes 0 gain.

Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.

How to approach this question

Liquidation = Double Tax. Step 1: Corp Gain = FMV - Asset Basis. Step 2: Shareholder Gain = FMV (Net of Liabs) - Stock Basis.

Full Answer

C.Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.✓ Correct

Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.

In a complete liquidation, the corporation recognizes gain as if it sold the assets at FMV (0,000 - ,000 = ,000). The shareholder recognizes gain on the exchange of stock for the assets (0,000 - ,000 = ,000).

Common mistakes

Forgetting the corporate level tax.

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