After a plan of complete liquidation has been adopted,Condor Corporation sells its only asset,land (basis of $300,000),to Eduardo (an unrelated party)for $700,000.Under the terms of the sale,Condor Corporation receives cash of $200,000 and Eduardo's notes for the balance of $500,000.The notes are payable over the next five years ($100,000 per year)and carry an adequate 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 $105,000 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?

Question

Quizplus · Accepted Answer

Maria may defer gain on the receipt of the notes to the point of collection.Maria will allocate her basis in the Condor stock between the cash and the installment notes.Using the relative fair market value approach,the stock basis is allocated $30,000 to the cash [$200,000 (amount of cash)F1F1F1S1F1F1F10 $700,000 (total distribution)F1F1F1S1F1F1F10 $105,000 (stock basis)],and $75,000 to the notes [$500,000 (FMV of notes)F1F1F1S1F1F1F10 $700,000 (total distribution)F1F1F1S1F1F1F10 $105,000 (stock basis)].Maria must recognize $170,000 [$200,000 (cash received)- $30,000 (basis allocated to the cash)] in the year of liquidation.Maria will report 85% of each note collected as capital gain [$425,000 (gross profit)÷ $500,000 (contract price)].The interest element will be accounted for separately.Condor Corporation will recognize a gain on the distribution equal to the excess of the installment notes' fair market value and the basis Condor had in the notes.

After a Plan of Complete Liquidation Has Been Adopted,Condor Corporation