During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?
A) Kena recognizes a gain of $530,000.
B) Ecru Corporation recognizes a gain of $250,000.
C) Kena recognizes a gain of $30,000.
D) Kena has a basis of $250,000 in the land.
E) None of the above.

Question

Quizplus · Accepted Answer

Kena's recognized gain on the distribution of the land is determined by the fair market value of the property received (i.e. $650,000) less Kena's basis in the Ecru Corporation stock (i.e. $120,000), less the amount of the liability assumed (i.e. $500,000). Therefore, Kena recognizes a gain of $30,000 ($650,000 - $120,000 - $500,000). Choices A, B, and D are incorrect because Ecru Corporation does not recognize any gain on the distribution, and Kena's basis in the land is equal to the fair market value of the land (i.e. $650,000), and not its basis.

During the Current Year, Ecru Corporation Is Liquidated and Distributes