Question

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

Answer 1

Answer:

b. $40,000

Explanation:

Step 1. Given information.

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.

Step 2. Formulas needed to solve the exercise.

Gain to be recognized by Loon Corporation  = Fair market value of the land - Basis

Step 3. Calculation.

Gain to be recognized by Loon Corporation  = $390,000 - $350,000 = $40,000

Step 4. Solution.

The correct answer is 2nd. i.e $40,000