After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of $220,000), to Eduardo (an unrelated party) for $300,000. Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000. The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate. Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation. Maria has a basis of $30,000 in the Condor stock. The installment notes have a value equal to their face amount. If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?

Question

Quizplus · Accepted Answer

Since Maria wishes to defer as much gain as possible, she must choose the installment method of reporting the gain on the sale to Eduardo. Under the installment method, the gain on the sale is recognized in proportion to the payments received each year. In this case, Maria received $50,000 in cash and $250,000 in notes, which are payable over five years at $50,000 per year. Therefore, Maria will recognize a gain of $50,000 ($300,000 - $220,000 - $30,000) in the year of liquidation, and $45,000 ($250,000/5) of gain each year for the next five years as she receives payments on the installment notes.

There is no gain or loss recognized by Condor Corporation on the distribution of the installment notes.

After a Plan of Complete Liquidation Has Been Adopted, Condor