CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, a domestic C corporation, made a liquidating distribution of property to its sole shareholder. The property had a fair market value (FMV) of $100,000 and an adjusted basis to the corporation of $60,000. The corporation had no liabilities. What is the amount of gain recognized by the liquidating corporation?
- A$100,000
- B$0
- C$60,000
- D$40,000
Show answer & explanationAnswer & explanation
Correct answer: D. $40,000
In a liquidating distribution, a C corporation recognizes gain or loss on the distribution of property as if the property were sold to the distributee at its fair market value. The gain recognized is FMV - Adjusted Basis = $100,000 - $60,000 = $40,000.
Why the other options are wrong
- A. This is the fair market value, not the recognized gain.
- B. This is incorrect; corporations generally recognize gain on liquidating distributions.
- C. This is the corporation's adjusted basis, not the recognized gain.
Corporate Liquidating Distributions
When a corporation liquidates, it generally recognizes gain or loss on the distribution of property as if it sold the property at fair market value.
- Corporation recognizes gain/loss on distributed assets.
- Shareholder recognizes gain/loss on receipt of assets.
- Double taxation can occur (corporate level and shareholder level).
Memory trick: Liquidate and Recognize, Like a Sale, Not a Surprise!