[Topsya]

Can someone please help me to understand this?

Kneenober Corp., an accrual-basis calendar-year C corporation, liquidated in 2011. In cancellation of all their Kneenober stock, each Kneenober shareholder received a liquidating distribution of $5,000 cash and land with a tax basis of $4,000 and a fair market value of $8,750. Before the distribution, each shareholder’s tax basis in Kneenober stock was $7,000. What amount of gain should each Kneenober shareholder recognize on the liquidating distribution?

A $0

B $1,750

C $2,000

D $6,750

The correct answer is D: $13,750-$7,000 = $6,750

But doesn’t the corporation need to recognize gain on distribution of property first?

$8,750 – $4,000 = $4,750. Therefore, liquidating distribution to the extend of $4,750 will be a dividend?

The other &7,000 will decrease the basis to zero.

And then $2,000 will be a capital gain.

what do you think?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Only Reg Left]

Are you referring to Becker book or Becker MCQ?

Like I mentioned earlier:

1) Corp recognizes gain on the distribution (FMV-Book)

2) SH recognizes gain on distribution (FMV-Basis)

In a liquidation, you have to zero your basis. So whatever's left over after the cash distribution is the basis in the land (to get it to zero)

AUD - 68, 77
REG - 84* (Expired)
FAR - 83
BEC - 74, 74, 72, 72, 84

[Topsya]

I am referring to Becker book, which says:

in CORPORATE LIQUIDATION

when CORPORATION DISTRIBUTES ASSETS TO SHAREHOLDERS

1. Corporation recognizes gain or loss as if it sold the assets for the FMV

So, first, the gain is recognized.

and THEN you zero out the basis as you mentioned.

Well, at least according to Becker…..

What do you think?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

I am referring to Becker book, which says:

in CORPORATE LIQUIDATION

when CORPORATION DISTRIBUTES ASSETS TO SHAREHOLDERS

1. Corporation recognizes gain or loss as if it sold the assets for the FMV

So, first, the gain is recognized.

and THEN you zero out the basis as you mentioned.

Well, at least according to Becker…..

What do you think?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[MikeHoncho]

I agree with @Only Reg Left. I know this is basically a summary of what they said but maybe it will help if I change the wording slightly:

Shareholders basis………………………………7,000

Reduced by cash distribution first…………(5,000)

Remaining basis…………………………………2,000

Reduced by FMV of land…………………….(8,750)

Excess of amount realized over basis…….6,750

Kneenobber Corp. will recognize a gain as if they sold the property. This gain will increase the corporations earnings & profits by $4,750 (FMV 8,750 – Cost 4000) but this doesn't change the shareholder's basis.

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[MikeHoncho]

I agree with @Only Reg Left. I know this is basically a summary of what they said but maybe it will help if I change the wording slightly:

Shareholders basis………………………………7,000

Reduced by cash distribution first…………(5,000)

Remaining basis…………………………………2,000

Reduced by FMV of land…………………….(8,750)

Excess of amount realized over basis…….6,750

Kneenobber Corp. will recognize a gain as if they sold the property. This gain will increase the corporations earnings & profits by $4,750 (FMV 8,750 – Cost 4000) but this doesn't change the shareholder's basis.

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[Only Reg Left]

Look at R3-49 Section X. You're missing the #2 which refers to the gain of the SH.

AUD - 68, 77
REG - 84* (Expired)
FAR - 83
BEC - 74, 74, 72, 72, 84

[Only Reg Left]

Look at R3-49 Section X. You're missing the #2 which refers to the gain of the SH.

AUD - 68, 77
REG - 84* (Expired)
FAR - 83
BEC - 74, 74, 72, 72, 84

[hzhao0802]

Yep. But the amount is taxed as dividend to the extent of E&P, not as capital gain. The question asks how much gain.. I think it's 2000

FAR - 88
REG - 88
AUD - 99
BEC - 87

[hzhao0802]

Yep. But the amount is taxed as dividend to the extent of E&P, not as capital gain. The question asks how much gain.. I think it's 2000

FAR - 88
REG - 88
AUD - 99
BEC - 87

[MikeHoncho]

“Under Sec. 331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P). The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered. If the stock is a capital asset in the shareholder’s hands, the transaction qualifies for capital gain or loss treatment.”

https://www.aicpa.org/publications/taxadviser/2012/september/pages/casestudy_sep2012.aspx

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[MikeHoncho]

“Under Sec. 331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P). The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered. If the stock is a capital asset in the shareholder’s hands, the transaction qualifies for capital gain or loss treatment.”

https://www.aicpa.org/publications/taxadviser/2012/september/pages/casestudy_sep2012.aspx

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[Author]

Replies