ExpertMedium1 markMultiple Choice
CPA · Question 44 · Area 4: Entity Taxation
A C Corporation distributes an asset (FMV 0,000, Basis ,000) to its sole shareholder in a complete liquidation. The shareholder's basis in the stock is ,000. What are the tax consequences?
A C Corporation distributes an asset (FMV 0,000, Basis ,000) to its sole shareholder in a complete liquidation. The shareholder's basis in the stock is ,000. What are the tax consequences?
Answer options:
A.
Corp recognizes 0 gain; Shareholder recognizes ,000 gain.
B.
Corp recognizes ,000 gain; Shareholder recognizes 0 gain.
C.
Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.
D.
Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.
How to approach this question
Liquidation = Double Tax. Step 1: Corp Gain = FMV - Asset Basis. Step 2: Shareholder Gain = FMV (Net of Liabs) - Stock Basis.
Full Answer
C.Corp recognizes ,000 gain; Shareholder recognizes ,000 gain.✓ Correct
In a complete liquidation, the corporation recognizes gain as if it sold the assets at FMV (0,000 - ,000 = ,000). The shareholder recognizes gain on the exchange of stock for the assets (0,000 - ,000 = ,000).
Common mistakes
Forgetting the corporate level tax.
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