Z owns a rental building (its only asset) with a gross fair market value of $5,0
ID: 2452754 • Letter: Z
Question
Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z's adjusted basis for this building is $1,500. All of Z's stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is $1,250 and on $3,000 gained is $1,000. Z sells the building, subject to the mortage, to D in the current year for $3,000 in cash. Z then liquidates, distributing all of the cash (remaining after paying its taxes) to C in cancellation of C's stock in the current year.
Assumption: same facts as above except, that Z adopts a plan of complete liquidation instead of selling the building to D. Z distributes the building to C "in kind" pursuant to the plan. C then sells the building to D for $3,000 in cash with D taking subject to the mortgage of $2,000.
a Section 336 treats Z as selling the building to C for $5,000
b Z will recognize $3,500 gain which is probably ordinary under Section 1239.
c C will take the property subject to both $2,000 mortgage and most likely a $1,250 tax due from Z to the IRS
d C's basis will be the fair market value of $5,000 under Section 334(a).
e All of the above.
Which one is the correct answer and why
Explanation / Answer
d) C's basis will be the fair market value of $5,000 under Section 334(a).
(a) General rule
If property is received in a distribution in complete liquidation, and if gain or loss is recognized on receipt of such property, then the basis of the property in the hands of the distributee shall be the fair market value of such property at the time of the distribution.
(b) Liquidation of subsidiary(1) In general
If property is received by a corporate distributee in a distribution in a complete liquidation to which section 332 applies (or in a transfer described in section 337 (b)(1)), the basis of such property in the hands of such distributee shall be the same as it would be in the hands of the transferor; except that, in the hands of such distributee—
(A) the basis of such property shall be the fair market value of the property at the time of the distribution in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, and
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