Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $150,000 as a result of the distribution.

Question

Quizplus · Accepted Answer

The fair market value of the land distributed is less than the mortgage amount, which means the shareholder is assuming the liability of the mortgage. As a result, the distribution is treated as a partial liquidation, and Grackle Corporation will recognize a loss of $250,000 rather than a gain of $150,000.

Grackle Corporation (E & P of $600,000) Distributes Cash of $200,000