Question

The stock in Black Corporation is owned by Sam and Susan, who are unrelated. Sam owns 70% and Susan owns 30% of the stock in Black Corporation. The following assets are to be distributed in complete liquidation of Black Corporation: Adjusted Fair Market Basis Value Cash $100,000 $100,000 Inventory 120,000 140,000 Equipment 220,000 180,000 Land 150,000 180,000

a. What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and equipment to Sam and the land to Susan?

b. What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and land to Sam and the equipment to Susan?

Answer 1

Part A

With respect to the distributions to Sam, Black Corporation will recognize a gain of $20,000 on the distribution of the inventory but not the loss of $40,000 on the distribution of the equipment. This is a distribution of loss property to a related party and the distribution is not pro rata; thus, the related-party loss limitation applies. With respect to the distribution of the land to Susan, Black Corporation will recognize a gain of $30,000.

Part B

With respect to the distribution of land to Sam, the $30,000 gain will be recognized under the related-party loss limitation. Again, this is a distribution of loss property to a related party and the distribution is not pro rata. With respect to the distributions to Susan, Black Corporation will recognize a gain of $20,000 on distribution of the inventory and a loss of $40,000 on the distribution of the equipment. Susan is not a related party and the built-in loss limitation does not apply.