Question

The stock of Mulberry Corporation is owned by Archana (60%) and Anar (40%), who are mother and daughter.

Pursuant to a plan of complete liquidation adopted earlier in the current year, Mulberry distributes land worth $575,000 to Anar (basis of $100,000 in Mulberry stock).

The land was purchased by Mulberry Corporation three years ago for $650,000, and it is distributed subject to a liability of $425,000.

What amount of gain or loss is recognized by Mulberry Corporation and by Anar with respect to the distribution of the land?

Answer 1

Mulberry Corporation recognizes a loss of $75,000 while Anar does not recognize any gain or loss on the distribution of the land.

Step-by-step explanation:

Mulberry Corporation would recognize a loss of $75,000 on the distribution of the land. This is calculated by subtracting the basis of $100,000 in Mulberry stock from the fair market value of the land, which is $575,000. Anar, on the other hand, would not recognize any gain or loss on the distribution.

The gain or loss recognized by a corporation on the distribution of property to its shareholders is determined by comparing the fair market value of the property to the shareholder's basis in the stock of the corporation.

In this case, Mulberry Corporation's loss of $75,000 represents the difference between the fair market value of the land ($575,000) and Anar's basis in the stock ($100,000).

Answer 2

Solution and Explanantion:

Determining the gain or loss recognized by M corporation

Loss to be recognised = Market Value – Purchase Value

`=\$ 575000-\$ 650000`= $75000

Thus, loss to be recognised by the “M” corporation is $75000

Determining the gain or loss of A:

`Loss by $\mathrm{A}=$ Purchase Value - Liability - Actual basis of $\mathrm{M}$`

`=[(\$ 575000-\$ 425000) * 40 \%]-\$ 100000`

`=\$ 60000-\$ 100000`

= ($40000)

Thus, loss to be recognised by A is $40000