The stock of Loon Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Loon Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Loon Corporation distributes land with a basis of $350,000 and fair market value of $390,000 to Gerald in liquidation of his stock interest. Gerald had a basis of $200,000 in his Loon stock. How much gain will Loon Corporation recognize in this liquidating distribution?
A) $0
B) $40,000
C) $190,000
D) $390,000
E) None of the above

Question

Quizplus · Accepted Answer

Since Duck Corporation holds 85% of the stock, this distribution is not a complete liquidation of the corporation under Section 332. Therefore, Loon Corporation will be recognized a gain of $40,000 ($390,000 FMV of land received - $350,000 basis of the land). Gerald's adjusted basis in the distributed land is $200,000 ($350,000 stock basis - $150,000 of prior dividend distributions), so he will have neither gain nor loss on the distribution.

The Stock of Loon Corporation Is Held as Follows: 85