Question

Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z’s adjusted basis for this building is $1,500. All of Z’s stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is$1250 and on $3,000 gained is $1,000. Z adopts a plan of complete liquidation instead of selling the building to D. Z distributes the building to C “in-kind” pursuant to the plan. C then sells the building to D for $3,000 in cash with D taking subject to the mortgage of $2,000. Z is an S Corporation and Section 1374 does not apply.

a. Z has $1,500 gain.

b. C has a $2,500 gain on the distribution.

c. C has a $1,000 ordinary loss on the distribution under Section 1244 if that section applies.

d. C has $1,000 capital loss.

e. None of the above.

please explain why choose this answer.

Answer 1

e. None of the above

C's basis will be the fair market value of $5,000 under Section 334(a). (a) General rule If property is received in a distribution in complete liquidation, and if gain or loss is recognized on the receipt of the property, then the distributee's basis in the property is the fair market value of the property at the time of the distribution. However, if property is received in a complete liquidation to which section 332 applies, including property received in satisfaction of an indebtedness described in section 337(b)(1), see section 334(b)(1) and paragraph (b) of this section.