During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000 . Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the
land, which of the following statements is correct?
a. Kena recognizes a gain of $530,000.
b. Ecru Corporation recognizes a gain of $250,000.
c. Kena recognizes a gain of $30,000.
d. Kena has a basis of $250,000 in the land.
e. None of the above.
c
RATIONALE: In a complete liquidation, a shareholder recognizes gain equal to the difference between the fair market value of property received from the corporation and the basis of the stock surrendered. When property is received subject to a liability, such liability reduces the amount realized by the shareholder. Thus, Kena recognizes a gain of $30,000 [$150,000 (net fair market value of land) – $120,000 (basis in Ecru stock)]. Ecru recognizes a gain of $400,000 [$650,000 (fair market value) – $250,000 (basis)] on the distribution of land. Kena's basis in the land is its fair market value on the date of the distribution, or $650,000.
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