ExpertMedium1 markMultiple Choice
CPA · Question 62 · Area 4: Entity Tax Planning
A C Corporation is liquidating. It distributes assets with a FMV of $500,000 and Basis of $200,000 to its sole shareholder. The shareholder's stock basis is $100,000. What are the tax consequences?
A C Corporation is liquidating. It distributes assets with a FMV of $500,000 and Basis of $200,000 to its sole shareholder. The shareholder's stock basis is $100,000. What are the tax consequences?
Answer options:
A.
Corp: No Gain; Shareholder: $400,000 Gain.
B.
Corp: $300,000 Gain; Shareholder: $400,000 Gain.
C.
Corp: $300,000 Gain; Shareholder: No Gain.
D.
Corp: No Gain; Shareholder: No Gain.
How to approach this question
1. Corporate Level: Liquidating distribution is treated as sale at FMV. Gain = $500,000 - $200,000 = $300,000.<br/>2. Shareholder Level: Received $500,000. Basis $100,000. Gain = $400,000.<br/>3. Result: Both recognize gain.
Full Answer
B.Corp: $300,000 Gain; Shareholder: $400,000 Gain.✓ Correct
B
The corporation recognizes gain on the distributed assets ($300,000). The shareholder recognizes capital gain on the exchange of stock ($400,000).
Common mistakes
Forgetting the corporate level gain.
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