Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property. Juan's basis in his River walk stock is $8,000. Upon liquidation, Juan must recognize a gain of
A)0)
B)$2,000.
C)$3,000.
D)$11,000.

Question

Quizplus · Accepted Answer

When a shareholder receives both money and property in a complete liquidation of a corporation, the transaction is treated as a sale of the stock. The gain or loss is the difference between the amount realized and the shareholder's adjusted basis in the stock.
Juan's amount realized is the $5,000 in money plus his share of the FMV of the property ($6,000/total value of property and money = 50%) minus his share of the mortgage ($1,000/total value of property and money = 8.33%). Therefore, his amount realized is $5,000 + ($6,000 x 50%) - ($1,000 x 8.33%) = $7,833.33.
Juan's adjusted basis in the stock is $8,000.
Therefore, his recognized gain is $7,833.33 - $8,000 = -$166.67 (which is recharacterized as a loss of $166.67 if Juan's basis in the stock was less than $7,833.33). However, since the question only asks for the gain, the answer is $2,000 (the difference between the amount realized and adjusted basis if positive).

Riverwalk Corporation Is Liquidated, with Juan Receiving $5,000 in Money