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?
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 ...
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.