Charlene and Dennis each own 50% of Brewster Corporation and have owned it for five years. The adjusted bases of their Brewster stock are $80,000 and $40,000 respectively. Brewster Corporation liquidates and distributes $60,000 to Charlene in exchange for her stock. It distributes a parcel of land with a $140,000 FMV which is subject to a $90,000 mortgage to Dennis in exchange for his stock.
Dennis assumes the mortgage and also receives $10,000 in cash.
a) What is the character and amount of each shareholder's gain or loss?
b) What is each shareholder's basis in the property received in the liquidation?
a) Charlene: $60,000 - $80,000 = $20,000 long-term capital loss.
Dennis: [($140,000 - $90,000) + $10,000] - $40,000 = $20,000 long-term capital gain. Here, the liability reduces the amount realized.
b) Charlene, $60,000 cash; Dennis, $140,000 basis for land and $10,000 cash.
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