J purchased 100 shares of C common stock in 2007 for $1,000.J purchased another 100 shares in 2012 for $10,000.In the current year, C adopts a plan of liquidation and distributes $8,000 to J as the first installment ($4,000 for each block).J's recognized gain or loss on the distribution is
A)$3,000 loss
B)$0 gain or loss
C)$3,000 gain
D)$8,000 gain

Question

Quizplus · Accepted Answer

J's basis for the first 100 shares is $1,000 and for the second 100 shares is $10,000, totaling $11,000. Receiving $8,000 reduces the basis proportionally across both blocks of shares. The recognized gain is calculated by subtracting the adjusted basis from the distribution amount. Since the distribution is less than the total basis, J recognizes a gain because the distribution is considered to come out of the capital invested. The gain is calculated as the distribution amount minus the adjusted basis allocated to the distribution, which results in a $3,000 gain.

J Purchased 100 Shares of C Common Stock in 2007