Key Corporation distributes a patent with an indeterminable value to Gary as part of a plan of complete liquidation. In addition, Gary receives $40,000 cash and land with a $70,000 FMV and a $30,000 adjusted basis. Gary's basis in the Key stock (a capital asset)surrendered is $120,000. If Gary relies on the open transaction doctrine, at the liquidation date he must recognize a
A)$0 gain.
B)$10,000 capital loss.
C)$30,000 capital loss.
D)$70,000 capital gain.

Question

Quizplus · Accepted Answer

According to the open transaction doctrine, the gain or loss on the distribution of property in a complete liquidation is not recognized until the taxpayer recovers their entire basis in the stock surrendered. In this case, Gary received cash and land with a total FMV of $110,000 ($40,000 + $70,000), and his basis in the stock surrendered was $120,000. Therefore, he has not recovered his entire basis and cannot recognize any gain or loss on the distribution of the patent.

Key Corporation Distributes a Patent with an Indeterminable Value to Gary