Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $400,000 and a fair market value of $480,000 on the date of the transfer.Magenta Corporation has two equal shareholders,Mark and Megan,who are father and daughter.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $360,000.Magenta Corporation sells the land for $360,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?
A)$0.
B)$20,000.
C)$40,000.
D)$130,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Since the land was acquired in a § 351 exchange, Magenta Corporation takes over the basis of the land, which is $400,000. Since the fair market value of the land on the date of acquisition was $480,000, there was no gain recognized at the time of the transfer. When the land is sold for $360,000, there is a loss of $40,000. This loss may be recognized by the corporation on the sale of the land, and therefore, the correct answer is C.

Magenta Corporation Acquired Land in a § 351 Exchange One