ExpertHard1 markMultiple Choice
CPA · Question 32 · Area II: Entity Tax Compliance
An S Corporation is liquidated. It distributes its only asset (Basis $100,000, FMV $150,000) to its sole shareholder. The shareholder's stock basis is $80,000. What is the shareholder's total recognized gain?
An S Corporation is liquidated. It distributes its only asset (Basis $100,000, FMV $150,000) to its sole shareholder. The shareholder's stock basis is $80,000. What is the shareholder's total recognized gain?
Answer options:
A.
$50,000
B.
$70,000
C.
$120,000
D.
$70,000
How to approach this question
1. Inside Gain: $150k - $100k = $50k. 2. Basis Adjustment: $80k + $50k = $130k. 3. Outside Gain: Proceeds $150k - Basis $130k = $20k. Total = $50k + $20k = $70k.
Full Answer
D.$70,000✓ Correct
1. S Corp recognizes gain on distribution: $150,000 - $100,000 = $50,000. <br/>2. This $50,000 passes through to the shareholder (recognized gain). <br/>3. Shareholder basis increases: $80,000 + $50,000 = $130,000. <br/>4. Shareholder recognizes gain on liquidation (exchange of stock): Amount Realized ($150,000) - Adjusted Basis ($130,000) = $20,000. <br/>5. Total recognized gain = $50,000 + $20,000 = $70,000.
Common mistakes
Ignoring the basis step-up from the corporate gain.
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