Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?
A)$200,000 gain recognized and a basis in the land of $600,000
B)$200,000 gain recognized and a basis in the land of $500,000
C)No gain recognized and a basis in the land of $600,000
D)No gain recognized and a basis in the land of $300,000

Question

Quizplus · Accepted Answer

When a corporation completely liquidates, any gain or loss is recognized by the corporation. Red Blossom Corporation received land with a fair market value of $500,000, which is less than the stock basis of $300,000. Therefore, Red Blossom Corporation recognizes a gain of $200,000 ($500,000 - $300,000). The basis of the land to Red Blossom Corporation is the same as the Tea Company's basis, which is $500,000. Therefore, the correct answer is B.

Red Blossom Corporation Transferred Its 40 Percent Interest to Tea