Lake Corporation distributes a building used in its business to Sandy in exchange for all of her Lake stock. Sandy's basis in her stock is $30,000 and the property she receives has a $90,000 FMV. As part of the distribution, Sandy assumes a liability associated with the property of $65,000. The property's basis prior to the liquidating distribution was $25,000. What are the tax consequences of
the distribution to Sandy? To Lake Corporation?
What will be an ideal response?
Sandy will recognize a $5,000 capital loss on the distribution [($90,000 - $65,000) - $30,000]. The basis of the building to Sandy will be $90,000. The holding period for the building begins on the day after the distribution. The $90,000 FMV of the assets is reduced by the $65,000 liability assumed in determining the amount of the distribution to Sandy. Lake Corporation will recognize a $65,000 [($25,000 net FMV of assets + $65,000 release from liabilities) - $25,000 adjusted basis] Sec. 1231 gain on the distribution. Some of the gain may be ordinary income under Sec. 291 (see Chapter C3).
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