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    What gains are recognized by the liquidating corporation?

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    A cash method corporation adopts a plan of complete liquidation and distributes the following assets to its shareholders:
    - A truck that was purchased for $25,000, is worth $18,000, and has a basis of $11,000.
    - An installment note receivable with a remaining face amount of $20,000, resulting from a sale of a warehouse for $75,000 seven years ago in which the warehouse's basis at the time of sale was $25,000.
    - Accounts receivable of $7,000.
    - Supplies and small tools previously expensed, worth $350.

    What gains are recognized by the liquidating corporation on the distributions in complete liquidation?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:43 pm ad1c9bdddf

    Solution Preview

    The rules for a complete corporate liquidation state that property is deemed to have been sold at fair market value, and any gain or loss will be reported at the corporate level.

    We can analyze the transactions as follows:

    Asset FMV Adjusted basis Gain or Loss

    Truck 18000 11000 7000
    Installment note 20000 6667 13333
    Accounts receivable 7000 0 7000
    Supplies and small tools 350 0 350

    Notes about the asset ...

    Solution Summary

    The solution analyzes the basis and gain for each type of asset and then explains the calculation and the law with regard to each transaction.