Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of
$460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

Question

Quizplus · Accepted Answer

Grackle Corporation will recognize a gain on the distribution of the land, calculated as the fair market value of the land ($400,000) minus its basis ($250,000), resulting in a gain of $150,000. Additionally, since the land is subject to a mortgage of $460,000, which exceeds the fair market value, Grackle will recognize an additional gain of $60,000 (the excess of the mortgage over the fair market value). Thus, the total gain recognized is $150,000 + $60,000 = $210,000.

Grackle Corporation (E & P of $600,000) Distributes Cash of $200,000