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:

Corp: No Gain; Shareholder: $400,000 Gain.

Corp: $300,000 Gain; Shareholder: $400,000 Gain.

Corp: $300,000 Gain; Shareholder: No Gain.

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. 2. Shareholder Level: Received $500,000. Basis $100,000. Gain = $400,000. 3. Result: Both recognize gain.

Full Answer

B.Corp: $300,000 Gain; Shareholder: $400,000 Gain.✓ Correct

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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