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Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation

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jepessoa

Answer:

C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.

Explanation:

Lilac corporation must recognize both a capital gain and an ordinary loss:

  • capital gain = (land 's fair market value - basis) + (stock's fair market value - basis) = ($600,000 - $300,000) + ($240,000 - $200,000) = $300,000 + $40,000 = $340,000  
  • ordinary loss = (inventory's fair market value - basis) = $80,000 - $100,000 = -$20,000