Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was$300,000. The land had a basis to Tea Company of $600,000. What amount of gain doesRed Blossom recognize in the exchange and what is its basis in the land it receives?

Question

Quizplus · Accepted Answer

When a corporation liquidates and distributes its assets to its shareholders in exchange for their stock, the transaction is treated as a sale of the stock. In this case, Red Blossom Corporation transferred its 40% interest in Tea Company to Tea Company in exchange for land. The fair market value of the land received by Red Blossom Corporation is $500,000, which is greater than its basis in the stock of Tea Company ($300,000). Therefore, Red Blossom Corporation must recognize a gain of $200,000 ($500,000 - $300,000). The basis of the land received by Red Blossom Corporation is $500,000, which is Tea Company's basis in the land.

Red Blossom Corporation Transferred Its 40 Percent Interest to Tea