A C Corporation liquidates. It distributes asset X (Basis $100,000, FMV $80,000) to Shareholder A. What is the tax consequence to the corporation?

Answer options:

No loss recognized.

Recognized loss of $20,000.

Recognized gain of $80,000.

Loss is recognized only if Shareholder A is a related party.

How to approach this question

Distinguish between Nonliquidating (no loss allowed) and Liquidating (loss allowed) distributions. IRC §336 treats liquidation as a sale at FMV.

Full Answer

B.Recognized loss of $20,000.✓ Correct

IRC §336(a). Upon complete liquidation, a corporation recognizes gain or loss as if the property were sold to the distributee at its fair market value. $80,000 - $100,000 = $20,000 loss.

Common mistakes

Applying the nonliquidating distribution rule (no loss) to a liquidation.

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