[Anonymous]

If you sold the land with a basis of 10,000 in 2013, why are you still calculating the 10,000 basis of the land in 2014 in the complete liquidation??????????

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Hard Luck owns 100% of the stock in Swamp Land, Inc., a calendar-year S corporation. On December 31, 2013, the corporation sells its only asset, land, for $50,000 and distributes $40,000 of the cash. In 2014, the corporation liquidates. Hard Luck’s stock basis is $50,000 before these transactions, and Swamp Land has a basis of $10,000 in the land. What is the amount and type of gain or loss that Hard Luck must recognize for 2013 and 2014?

A. 2013: $10,000 capital gain; 2014: $(40,000) capital loss

B. 2013: $0; 2014: $40,000 capital gain

C. 2013: $40,000 capital gain; 2014: $(40,000) capital loss

D. 2013: $(40,000) capital loss; 2014: $0

In 2013, the shareholder recognizes $40,000 in passed-through capital gain from the land sale. The $40,000 capital loss is not allowed until 2014, the year of liquidation. It would have been preferable for the company to liquidate in 2013 or postpone the sale until 2014. Then the capital loss would have offset the capital gain.

Cash received for land $50,000

Basis in land – 10,000

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Gain on sale of land $40,000

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The capital gain would flow through to the shareholder, Hard Luck, and appear on Hard Luck’s Schedule K-1 (Form 1120S).

The basis of the shareholder’s stock is increased by his or her allocable share of all income items of the corporation (including tax-exempt income) that are separately computed and passed through to shareholders, e.g., capital gains.

The basis of the S corporation shareholder’s stock is decreased (but not below zero) by his or her allocable share of cash and property distributions by the corporation which were not included in the shareholder’s income.

Hard Luck’s stock basis before transactions: $50,000

Gain on sale of land 40,000

Cash distribution to Hard Luck (40,000)

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Hard Luck’s stock basis 12/31/2013: $50,000

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In 2014, Swamp Land, Inc., liquidates. Swamp Land still has $10,000 in assets: $50,000 in cash received from the sale of its only asset (land) on December 31, 2013, minus the $40,000 in cash distributed to Hard Luck on December 31, 2013. This $10,000 in cash would be distributed to Hard Luck, the sole shareholder of Swamp Land, upon liquidation.

Cash received by Hard Luck upon liquidation

of Swamp Land, Inc.: $10,000

Hard Luck’s stock basis – 50,000

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Capital loss upon liquidation of Swamp Land, Inc. $(40,000)

[Anonymous]

Let me see if I can understand this question and respond at the same time.

First – let's talk about Swamp Land.

Land is valued at $10,000. Sells for $50,000.

Capital gain of $40,000. Pretty easy. This gets passed through to Hard Luck.

Now – need to look at the capital account:

Capital account in Swamp Land (before sale) $50,000

Plus net income of sale + 40,000

Less Distributions ($40,000)

Capital account 1/1/14 = $50,000

NOTE: Sold for $50,000 – distributed $40,000 – still have $10,000 in cash

Hard Luck side:

Basis in Swamp Land (before sale) $50,000

Sale happens – net income is passed through $40,000

Less distributions (40,000)

Basis at 1/1/14 = still $50,000

Swamp Land liquidates – IE – distributes the last $10,000 in cash.

Basis at 1/1/14 : $50,000

Less Cash ($10,000)

Basis: $40,000

Received nothing else – so you have a loss of $40,000 – your remaining basis.

What a tricky question! Hope this helps!!

[Anonymous]

That does help, thanks. I figure if I get something like this on the exam, I'm just going to guess lol.

[Author]

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