Question

Rogers Corporation acquired land in a § 351 exchange in November 2017. The land had a basis of $500,000 and a fair market value of $550,000 on the date of the transfer. Rogers Corporation has two equal shareholders (i.e., each owns 50%), Chris and Mindy, who are father and daughter. Rogers adopts a plan of liquidation in March 2019. At the time the plan was adopted, the land had decreased in value to $400,000.

Required: Determine the dollar amount of loss that Rogers Corporation may recognize in each of the independent situations below.

(a)   Rogers Corporation distributes the land pro rata to Chris and Mindy.

(b)   Rogers Corporation sells the land for $400,000 and distributes the proceeds to Chris and Mindy.

(c)   Assume the same facts as stated above, except that the land had a basis of $500,000 and a fair market value of $450,000 in November 2017 when it was acquired in the
§ 351 transaction. If Rogers Corporation were to sell the land and distribute the proceeds to Chris and Mindy, what amount of loss may Rogers recognize?

Answer 1

(a) Since Roger Corporation had acquired the land in a 351 exchange, no gain or loss would have been recognized and the land would have been taken over at carryover basis of $500,000.

When Roger Corporation distributes land to Chris and Mindy pro rata in the liquidating distribution, Roger Corporation would recognize the gain/loss on the land as if it is sold at FMV.

Loss to be recognized = $500,000 - $400,000 = $100,000

(b)  Since Roger Corporation had acquired the land in a 351 exchange, no gain or loss would have been recognized and the land would have been taken over at carryover basis of $500,000.

When Roger Corporation sales the land at $400,000 it would realize a loss of $100,000 and the same would also be recognized.

However when the proceeds of land are distributed to Chris and Mindy, no gain or loss is recognized.

(c) Since Roger Corporation had acquired the land in a 351 exchange, no gain or loss would have been recognized. However, when the carryover basis of the property is greater than its FMV on the date of exchange, Corporation's basis in the property is limited to the FMV of the property.

Thus Roger Corporation's basis in the land would have been = $450,000

Now when Roger sells the land for $400,000 it would realize a loss = $450,000 - $400,000 = $50,000

This loss shall be recognized.

However when the proceeds of land are distributed to Chris and Mindy, no gain or loss is recognized.

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