Pursuant to a complete liquidation in the current year, Scarlet Corporation distributes to Jake land (basis of $425,000, fair market value of $390,000) that was purchased three years ago and held as an investment. The land is subject to a liability of $250,000. Jake, who owned 35% of the Scarlet Corporation shares outstanding, had a basis of $60,000 in the stock. What are the tax consequences of the liquidating distribution to Scarlet Corporation and to Jake?

Question

Business

Jamir Whitaker

29 May, 09:16

Pursuant to a complete liquidation in the current year, Scarlet Corporation distributes to Jake land (basis of $425,000, fair market value of $390,000) that was purchased three years ago and held as an investment. The land is subject to a liability of $250,000. Jake, who owned 35% of the Scarlet Corporation shares outstanding, had a basis of $60,000 in the stock. What are the tax consequences of the liquidating distribution to Scarlet Corporation and to Jake?

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Timothy Klein · Answer 1

The Long-term capital gain (Jake recognize) = $80,000

However, the Jake considered the basis of $390,000 (Land).

Explanation:

From the questions given we find the following,

What are the consequences of tax for the distribution liquidating to Jake and Scarlet Corporation

Then,

The Long-term capital loss (Scarlet Corporation recognize) = Fair market value - Basis

The Long-term capital loss (Scarlet Corporation recognize) = $390,000 - $425,000

The Long-term capital loss (Scarlet Corporation recognize) = $35,000

The Long-term capital gain (Jake recognize) = (Fair market value of land - Liability) - Basis of stock

The Long-term capital gain (Jake recognize) = ($390,000 - $250,000) - $60,000

The Long-term capital gain (Jake recognize) = $80,000

However, the Jake considered the basis of $390,000 (Land).