ExpertHard1 markMultiple Choice
CPA · Question 67 · Area V: Entity Taxation
A C corporation distributes assets in a complete liquidation. The assets have a basis of $100,000 and FMV of $150,000. The shareholder has a stock basis of $80,000. What are the tax consequences?
A C corporation distributes assets in a complete liquidation. The assets have a basis of $100,000 and FMV of $150,000. The shareholder has a stock basis of $80,000. What are the tax consequences?
Answer options:
A.
Corporation recognizes no gain; Shareholder recognizes $70,000 gain.
B.
Corporation recognizes $50,000 gain; Shareholder recognizes no gain.
C.
Corporation recognizes $50,000 gain; Shareholder recognizes $70,000 gain.
D.
Corporation recognizes $50,000 gain; Shareholder recognizes $20,000 gain.
How to approach this question
Liquidation = Double Tax. 1. Corp sells assets (FMV - Basis). 2. Shareholder sells stock (FMV received - Stock Basis).
Full Answer
C.Corporation recognizes $50,000 gain; Shareholder recognizes $70,000 gain.✓ Correct
In a complete liquidation, the corporation recognizes gain as if assets were sold at FMV ($150,000 - $100,000 = $50,000). The shareholder treats the property received as full payment for the stock ($150,000 - $80,000 = $70,000 gain).
Common mistakes
Forgetting the corporate level tax.
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