After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of $220,000), to Eduardo (an unrelated party) for $300,000.Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000.The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate.Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation.Maria has a basis of $30,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?
A)Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
B)Maria recognizes a gain of $20,000 in the year of liquidation.
C)Maria recognizes a gain of $45,000 in the year of liquidation.
D)Maria recognizes a gain of $270,000 in the year of liquidation.
E)None of the above.

Question

Quizplus · Accepted Answer

Condor Corporation will recognize a gain of $80,000 ($300,000 - $220,000) on the sale of the land. Since the sale was made to an unrelated party, it is a taxable transaction.

Condor Corporation will recognize no gain or loss on the distribution of the cash and notes to Maria, as the distribution is treated as a complete liquidation.

Maria's basis in the notes is $250,000 (the face amount), and her basis in the stock is $30,000. Thus, Maria's total basis in the assets received is $280,000.

Maria will recognize a gain of $45,000 ($250,000 - $30,000 - $175,000) in the year of liquidation. This gain is treated as long-term capital gain since the asset was held for more than one year.

Therefore, the correct answer is C. Maria will recognize a gain of $45,000 in the year of liquidation.

After a Plan of Complete Liquidation Has Been Adopted, Condor