Question

Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property. Juan's basis in his River walk stock is $8,000. Upon liquidation, Juan must recognize a gain of:_______.A) 0.B) $2,000.C) $3,000.D) $11,000.

Answer 1

B) $2,000.

Step-by-step explanation:

Juan's gain/loss = net distribution - basis

• net distribution = $5,000 (cash) + $6,000 (property) - $1,000 (mortgage) = $10,000
• basis = $8,000

Juan's gain = $10,000 - $8,000 = $2,000

Even if Juan had previously transferred the property in a Section 351 exchange, he would still have to recognize a gain because the liquidation included other assets. If the liquidation had only included the land (e.g. FMV $11,000) and two years would have passed since the original Section 351 transfer, then Juan wouldn't have needed to pay taxes.

Answer 2

The correct option is B,$2000

Step-by-step explanation:

The gain on the cash and property received by Juan can be computed thus:

Cash received $5,000

Property less mortgage:

Property value $6000

Mortgage ($1000) $5000

Total $10,000

less stock basis ($8,000)

gain on stock $2,000

Option A is since the value of cash and property received is not $8,000 which gives a no gain no loss outcome.

Option C is wrong since the property mortgage of $1000 must be deducted from the property before computing the gain or loss.

Option D is obviously wrong as the $11,000 is just the summation of property value of $6000 without considering mortgage and the cash received.