Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter.One year ago, the two shareholders transferred properties to Purple in a § 351 exchange.Joshua transferred land (basis of $400,000, fair market value of $350,000) and securities (basis of $20,000, fair market value of $80,000), while Ellie transferred equipment (basis of $220,000, fair market value of $430,000).In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $290,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the land?
A)$0.
B)$50,000.
C)$60,000.
D)$110,000.
E)None of the above.

Question

Quizplus · Accepted Answer

According to the tax code, when a shareholder transfers property to a corporation in a § 351 exchange, the corporation takes over the adjusted basis of the property in the hands of the shareholder. In this case, Purple takes over Joshua's basis of $400,000 in the land and $20,000 in securities, and Ellie's basis of $220,000 in equipment. The total adjusted basis for the assets is $640,000.

When the undeveloped land is sold for $290,000, Purple realizes a loss of $110,000 ($400,000 - $290,000). However, the tax code prohibits loss recognition in a § 351 transaction between a corporation and shareholders. Therefore, Purple cannot recognize any loss on the sale of the land.

The other properties were sold at a gain, but the question only asks about the loss on the sale of the land.

Purple Corporation Has Two Equal Shareholders, Joshua and Ellie, Who