Question

During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of the 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 is correct?

a. Kena recognizes a gain of $530,000
b. Ecru Corporation recognizes a gain of $250,000

Answer 1

The correct option is that Kena will recognize the gain amounts to $30,000

Step-by-step explanation:

Computing the value of basis of land is as follows:

Value of basis of land = Fair market value - Liability

where

Fair market value amounts to $650,000

Liability amounts to $500,000

Putting the values above:

= $650,000 - $500,000

= $150,000

And the basis in stock amounts to $120,000

So, the gain would be:

Gain = Value of basis of land - Basis in stock

= $150,000 - $120,000

= $30,000

Note: Correct option is missing in the question, so providing direct answer.