A C Corporation is considering liquidating. It has assets with a basis of $100,000 and FMV of $500,000. The sole shareholder has a stock basis of $50,000. If the corporation liquidates and distributes the assets to the shareholder, what is the total tax consequence (Corporate + Shareholder level)?

Answer options:

Corporation recognizes $0 gain; Shareholder recognizes $450,000 gain.

Corporation recognizes $400,000 gain; Shareholder recognizes $0 gain.

Corporation recognizes $400,000 gain; Shareholder recognizes $450,000 gain.

Corporation recognizes $0 gain; Shareholder recognizes $0 gain.

How to approach this question

Liquidation of C Corp = Double Tax. 1. Corp sells assets to shareholder (deemed sale) -> Gain. 2. Shareholder exchanges stock for assets (deemed exchange) -> Gain. Calculate both independently.

Full Answer

C.Corporation recognizes $400,000 gain; Shareholder recognizes $450,000 gain.✓ Correct

IRC §336 requires the corporation to recognize gain as if assets were sold at FMV ($400,000 gain). IRC §331 requires the shareholder to treat the property received as full payment for the stock ($500,000 received - $50,000 basis = $450,000 gain).

Common mistakes

Forgetting the corporate level tax (General Utilities doctrine repeal).

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