The stock of Brown Corporation (E & P of $680,000) is owned as follows: 80% by Orange Corporation (basis of $620,000), and 20% by Susanna (basis of $155,000). Both shareholders purchased their shares in Brown five years ago. In the current year, Brown Corporation liquidates and distributes land (fair market value of $800,000, basis of $970,000) to Orange Corporation, and securities (fair market value of $200,000, basis of $160,000) to Susanna. Which of the following statements is incorrect with respect to the tax consequences resulting from these distributions?

Question

Quizplus · Accepted Answer

A) Susanna's basis in the securities is stepped up to the fair market value of $200,000, resulting in a recognized gain of $45,000 ($200,000 - $155,000 basis).
B) Brown recognizes no loss on the distribution of the land, as the basis of the land is greater than its fair market value, and no gain is recognized since no cash was received.
C) Orange's basis in the land is stepped up to the fair market value of $800,000, as it received the land in a liquidating distribution.
D) This statement is incorrect. Brown recognizes a $160,000 loss on the distribution of the securities since their basis was $160,000 and they distributed securities with a fair market value of $200,000.
E) Therefore, the correct answer is D.

The Stock of Brown Corporation (E & P of $680,000)