Question

Texas Corporation is undergoing a complete liquidation and distributes land to​ Robert, one of its​ shareholders, in exchange for all of​ Robert's stock. The land has a basis of​ $300,000 and an FMV of​ $400,000 on Texas​ Corporation's books and is subject to a​ $325,000 liability. Robert assumes the liability on the property.​ Robert's basis in his Texas Corporation stock is​ $100,000. What is the amount of gain or loss recognized by Robert on the​ distribution?

Answer 1

Answer:

Loss to be recognized is $25000

Explanation:

Liquidation refers to a process whereby a company's operation come to an end, which leads to distribution of assets and liabilities to the claimants and winding up the business.

A company may be forced to liquidate owing to consistent losses. In such cases, the claims of all the stakeholders cannot be satisfied and they receive pro-rata basis allocation which covers everybody's claim to an extent, if not fully.

In the given case,

Robert's receipt is Land. Liabilities attached to the land being $325,000 while the land has fair market value of $400,000.

Thus, after assuming the liability, Robert's actual realized amount is,

$400,000 - $325,000 = $75,000

Since, the land was received in consideration for discharge of Robert's own share in company amounting to $100,000.

Thus, Gain/Loss to be recognized by Robert = $75, 000 (receipts) - $100,000

                                                                  = - $25,000

i.e Robert should recognize a loss of $25,000.