Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?
A) Lilac Corporation would recognize no gain or loss on the liquidation.
B) Lilac Corporation would recognize a net capital gain of $320,000.
C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D) Lilac Corporation would recognize a net capital gain of $340,000.
E) None of the above.

Question

Quizplus · Accepted Answer

When a corporation completely liquidates, it must recognize gain or loss on the distribution of its assets to the shareholders. In this case, Lilac Corporation will recognize a capital gain of $300,000 ($600,000 fair market value of land - $300,000 basis) and a capital gain of $40,000 ($240,000 fair market value of securities - $200,000 basis). However, it will also recognize an ordinary loss of $20,000 because the inventory's fair market value is less than its basis. Therefore, the net capital gain will be $340,000 and the ordinary loss will be $20,000, making choice C the correct answer.

Pursuant to a Complete Liquidation, Lilac Corporation Distributes the Following