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 $555,000. The corporation's basis in the Tea Company stock was $422,500. The land had a basis to Tea Company of $815,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

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When Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company, it received land with a fair market value of $555,000.

The corporation's basis in the Tea Company stock was $422,500. This means that if Red Blossom Corporation had sold the stock instead of using it to acquire the land, it would have recognized a gain of $132,500 ($555,000 - $422,500).

However, in this case, the stock was exchanged for the land as part of a complete liquidation of the company. Therefore, no gain or loss is recognized by Red Blossom Corporation on the exchange (Section 332 of the Internal Revenue Code).

Red Blossom Corporation receives a basis in the land equal to the basis of the Tea Company stock at the time of the exchange, which is $422,500. However, the land has a basis to Tea Company of $815,000. Therefore, Tea Company will have a built-in gain of $292,500 ($815,000 - $522,500) in the land.

Red Blossom Corporation Transferred Its 40 Percent Interest to Tea