K purchased all 100 shares of N Corporation in 2004 for $50,000.N Corporation adopts a plan of liquidation on January 1, 2012.On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment note with a face amount and fair market value of $90,000.On December 1, 2012, N distributes the cash and note to K.On her 2012 tax return, K will report which of the following as gain from the liquidation? (Assume no collections on the installment note during 2012.)
A)$0
B)$5,000
C)$50,000
D)$100,000

Question

Quizplus · Accepted Answer

K's basis in N Corporation is $50,000. The distribution she receives on December 1, 2012, includes $10,000 cash and an installment note with a face amount of $90,000, which has a fair market value of $90,000. Therefore, the total distribution is valued at $100,000 ($10,000 cash + $90,000 note). Since K's basis in N Corporation is $50,000, she has a gain of $50,000 ($100,000 - $50,000), which she must report as gain from the liquidation on her 2012 tax return. However, since the installment note was not collected during 2012, K does not have to report any additional gain on her 2012 tax return. Thus, the correct answer is B.

K Purchased All 100 Shares of N Corporation in 2004