Z owns a rental building (its only asset) with a gross fair market value of $5,0

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.

Assumpiton; same facts as above, except that C contributes to Z securities with a basis of $5,000 and a value of $1,500 in the preceding year so that C's stock basis increases to $5,500. Z then sells the securities to D for $1,000 along with the building as previously sold.

a Z will recognize a $4,000 loss on the sale of the securities

b Z will recognize a $500 loss on the sale of the securities under 336(d)(2), unless the presumption of tax avoidance purposes is rebutted.

c Neither of the above

Which one is the correct answer and why?

Explanation / Answer

b Z will recognize a $500 loss on the sale of the securities under 336(d)(2), unless the presumption of tax avoidance purposes is rebutted.

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