Zeke Corp., an accrual-basis, calendar-year C corporation, had no corporate shareholders when it liquidated in the current year. In the cancellation of all their Zeke stock, each Zeke shareholder received a liquidating distribution of $4,000 cash and land with a tax basis of $10,000 and a fair market value of $21,000. Before the distribution, each shareholder’s tax basis in Zeke stock was $13,000. What amount of gain should each Zeke shareholder recognize on the liquidating distribution?
The amount realized on the liquidation of a corporation is the amount of money received plus the FMV of property received. The recognized gain is the amount by which this exceeds the adjusted basis of the corporation’s stock. The recognized gain of this distribution is
Amount realized | $25,000 |
Less: Adjusted basis | (13,000) |
Gain recognized | $12,000 |
| A corporation was completely liquidated and dissolved during the current year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are |
| The filing fees, professional fees, and other liquidation-related expenses are deductible in the final tax return of the corporation under Sec. 162(a). |
| Under a plan of complete liquidation, Bluebird Corporation distributed land, having an adjusted basis to Bluebird of $52,000, to its sole shareholder. The land was subject to a liability of $76,000, which the shareholder assumed for legitimate business purposes. The fair market value of the land on the date of distribution was $70,000. What is the amount of Bluebird Corporation’s recognized gain or loss? |
| Section 336(a) provides that a corporation should treat a complete liquidation as a sale using the fair market value. However, Sec. 336(b) requires that the fair market value used should not be less than any liability accepted by the distribute. Since Bluebird is transferring property with a liability of $76,000, which is higher than the $70,000 FMV, the $76,000 is used as the new FMV. Therefore, Bluebird Corporation recognizes a $24,000 gain ($76,000 new FMV – $52,000 adjusted basis). |
| Six years ago, Adam purchased 100 shares of Call Corporation stock for $50 per share. During the current year, Call completely liquidated. After paying its liabilities, Call distributed to its shareholders $10,000 in cash and appreciated property sold for $90,000. Adam’s portion received a liquidating distribution from Call of $10,000. Adam must report what amount of capital gains income from this distribution? |
| A shareholder treats amounts distributed in complete liquidation as realized in exchange for stock. Capital recovery to the extent of basis is permitted before recognizing gain or loss. Amounts realized include money and the FMV of other distributed property received. Adam should recognize $5,000 of gain ($10,000 value of distribution received – $5,000 basis in stock). |
| When Paul formed his corporation 5 years ago, he invested $5,000 in corporate stock. In the current year, when his basis in the stock was $10,000, he liquidated his corporation receiving $15,000 cash. How should Paul report this disposal on his return? |
| Section 331 provides capital gain or loss treatment for distributions received by a shareholder in complete liquidation of a corporation. The gain or loss will be long-term or short-term depending on the length of time the stock has been held (Sec. 1222). The shareholder’s gain or loss is the difference between the amount realized and the basis in the stock. Therefore, Paul will realize a long-term capital gain of $5,000 ($15,000 – $10,000) because the stock was held for 5 years. |
| In Year 1, Mark purchased 100 shares of Roman, Inc., for $10 per share. In Year 5, Roman completely liquidated and distributed $8,000 to Mark. Mark must report income from this distribution as |
| A shareholder treats amounts distributed in complete liquidation as realized in exchange for stock. Capital recovery to the extent of basis is permitted before recognizing gain or loss. Holding period will not include that of the liquidated corporation. Capital gains treatment is afforded a complete liquidation. The character of the recognized gain or loss depends on the nature of each block of the stock in the hands of the shareholder. |
| Belle Corporation owns as an investment 10% of the stock of Ton Corporation, with an adjusted basis of $4,000 and a fair market value of $44,000. Belle uses the Ton stock to redeem approximately 1%, or $10,000 par value, of its own outstanding stock from unrelated, noncorporate shareholders. As a result of this transaction, Belle must report a gain of |
| A corporation that distributes property in the redemption of its stock generally recognizes gain, but not loss, if it pays all or part of the redemption price by transferring property whose fair market value exceeds its basis to the corporation. Thus, Belle Corporation must recognize the $40,000 gain inherent in the difference between the value of the Ton stock ($44,000) and its basis ($4,000). |
| Wargo Corporation has two equal shareholders, Karen and Bob. Each shareholder owns 10 shares of Wargo stock and has owned the stock for several years. Each share has a $100 basis and a $150 FMV. Wargo, which has sufficient E&P, redeems five shares from Bob at the $150 FMV. What income, if any, does Bob recognize as a result of the redemption? |
| The redemption of Bob’s shares qualifies as a redemption. Bob recognizes a $250 capital gain [5 shares × ($150 selling price – $100 basis)]. |
| Corporation H has 1,000 shares of stock outstanding. Mr. K, the founder, owns 40% of the stock, his wife owns 10%, his son owns 20%, and the balance is owned by unrelated parties. Under the constructive-ownership rules of the stock redemption provisions, what percentage of stock is Mr. K considered to own? |
| The stock redemption provisions found in Sec. 302 use the constructive-ownership (attribution) rules of Sec. 318. Under the Sec. 318(a)(1) rules, an individual is considered to own the stock owned by members of his or her family including his or her spouse, children, grandchildren, and parents. Therefore, Mr. K owns 40% of the stock directly, and he indirectly owns the stock owned by his wife and son. Mr. K has direct and indirect ownership of 70% (40% + 20% + 10%) of Corporation H. For that matter, so do his wife and son. |
