Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?
A) Lilac Corporation would recognize no gain or loss on the liquidation.
B) Lilac Corporation would recognize a net capital gain of $320,000.
C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D) Lilac Corporation would recognize a net capital gain of $340,000.
E) None of these.

Question

Quizplus · Accepted Answer

Lilac Corporation would recognize a capital gain on the distribution of the land and marketable securities, calculated as the difference between their fair market values and their bases. For the land, the gain is $600,000 - $300,000 = $300,000. For the marketable securities, the gain is $240,000 - $200,000 = $40,000. This totals a net capital gain of $340,000. The inventory, distributed at less than its basis, results in an ordinary loss of $100,000 - $80,000 = $20,000. Therefore, Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.

Pursuant to a Complete Liquidation, Lilac Corporation Distributes the Following