Carly owns 25% of Base Corporation's single class of stock and Premier Corporation owns the remaining 75%. Carly's basis in the Base stock is $200,000 and Premier Corporation's basis in the Base stock is $600,000. Carly receives property with a $175,000 adjusted basis and a $250,000 FMV and Premier Corporation receives property with a $600,000 adjusted basis and a $750,000 FMV in complete liquidation of Base Corporation. All of Base's cash is used to pay its liabilities. Which of following statements is correct concerning the tax effects of the liquidation?
A)Neither Carly nor Premier Corporation will recognize a gain.
B)Carly will recognize some gain but Premier Corporation will not recognize any gain.
C)Both Carly and Premier will recognize some gain.
D)Carly will not recognize any gain but Premier will recognize some gain.

Question

Quizplus · Accepted Answer

When a corporation is completely liquidated, the shareholders will recognize gain or loss based on the difference between the fair market value of property received and their adjusted basis in the stock surrendered. In this case, Carly received property with a fair market value of $250,000 and Premier Corporation received property with a fair market value of $750,000.

Carly's basis in the Base stock was $200,000, so she will recognize a gain of $50,000 ($250,000 - $200,000). Premier Corporation's basis in the Base stock was $600,000, so they will recognize a gain of $150,000 ($750,000 - $600,000).

Therefore, both Carly and Premier will recognize some gain. Choice C is the correct answer.

Carly Owns 25% of Base Corporation's Single Class of Stock