Under a plan of complete liquidation, Coast Corporation distributes land with a $300,000 adjusted basis and a $400,000 FMV to William, a 25% shareholder. William has a $200,000 basis in his Coast stock. The land is inventory in the hands of Coast Corporation. Coast Corporation must recognize
A)no gain.
B)$100,000 of ordinary income.
C)$100,000 of long-term capital gain.
D)$200,000 of ordinary income.

Question

Quizplus · Accepted Answer

Under a plan of complete liquidation, when a corporation distributes property (in this case, inventory) to its shareholders, it must recognize gain as if the property were sold at its fair market value (FMV). Since the land is inventory and has an FMV of $400,000 with an adjusted basis of $300,000, Coast Corporation must recognize $100,000 of ordinary income, not capital gain.

Under a Plan of Complete Liquidation, Coast Corporation Distributes Land