During the current year, Ecru Corporation is liquidated and distributes its only

Question

During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $40,000 and a fair market value of $ 50,000. Kena has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct? a. Kena recognizes a gain of $200,000 b. Kena recognizes a gain of $10,000 c. Kena recognizes a loss of $70,000 d. Kena recognizes $0 gain or loss.

Explanation / Answer

In this case Kena will recognize a loss.

Amount of loss = Kena’s basis in Ecru stock – fair market value of the land

= 120,000 – 50,000

= 70,000

Thus the answer is option “c” - Kena recognizes a loss of $70,000.

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