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 $535,000. The corporation's basis in the Tea Company stock was $315,000. The land had a basis to Tea Company of $617,500. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

Question

Quizplus · Accepted Answer

When a shareholder receives property in a complete liquidation, the transaction is treated as a sale of the stock, and any gain or loss is recognized. Here, Red Blossom Corporation is receiving land in exchange for its 40% interest in Tea Company. The fair market value of the land ($535,000) is greater than Red Blossom's basis in the Tea Company stock ($315,000), so there is a gain of $220,000 ($535,000 - $315,000).

Red Blossom's basis in the land it receives is the same as Tea Company's basis in the land ($617,500), as the exchange is tax-free to Tea Company under the assumption that Tea Company's basis in the stock is less than the fair market value of the land.

Therefore, the correct answer is B.

Red Blossom Corporation Transferred Its 40 Percent Interest to Tea