Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was$400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives?

Question

Quizplus · Accepted Answer

When a shareholder transfers their stock as part of a liquidation and receives property in return, the transaction is governed by Section 331 of the Internal Revenue Code. Under this section, no gain or loss is recognized by the shareholder on the transfer of the stock. The shareholder’s basis in the property received is equal to the property’s adjusted basis in the hands of the corporation. In this case, Paladin Corporation received land with a fair market value of $1,000,000, but Furman Company's basis in the land was only $200,000. Therefore, Paladin’s basis in the land is also $200,000. Since no gain is recognized on the transfer of the stock, the correct answer is C: no gain recognized and a basis in the land of $200,000.

Paladin Corporation Transferred Its 90 Percent Interest to Furman Company