Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $600,000, fair market value of $450,000) and securities (basis of $70,000, fair market value of $250,000), while Ellie transferred equipment (basis of $420,000, fair market value of $700,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?
A) $0
B) $140,000
C) $150,000
D) $290,000
E) None of the above

Question

Quizplus · Accepted Answer

When the land was transferred in a § 351 exchange, Joshua's basis of $600,000 carried over to the corporation as his basis in the land. Since the land was sold for $310,000, the corporation realized a loss of $290,000. The loss can be recognized by Purple Corporation because the land was not used for any business purpose during the time it was owned by the corporation. This loss is allocated equally to the two shareholders under the pro rata distribution. Thus, each shareholder can claim a loss of $145,000 ($290,000/2) on their individual tax returns.

Purple Corporation Has Two Equal Shareholders, Joshua and Ellie, Who