Katarina's Liquidation Exchange with Spartan Company

Katarina's Liquidation Exchange with Spartan Company

Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to the Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives?

A. $100,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina
B. $150,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina
C. No gain recognized by Spartan and a basis in the land of $100,000 to Katarina
D. No gain recognized by Spartan and a basis in the land of $50,000 to Katarina

Final answer:

In the given liquidation scenario, Spartan recognizes a gain of $150,000, being the fair market value minus their basis in the land. Katarina's basis in the land is equal to its fair market value at the time of the transfer, which is $200,000.

Explanation:

When Katarina transferred her 10 percent interest to the Spartan Company as part of a complete liquidation, the tax consequences for both the company and Katarina depend on their respective bases in the assets exchanged. Spartan Company recognizes gain when it distributes property in a liquidation that exceeds its basis in that property.

In this scenario, Spartan recognizes a gain of $150,000, which is the difference between the fair market value of the land ($200,000) and its basis in the land ($50,000). Katarina's basis in the land received is equal to its fair market value at the time of the transaction, which is $200,000, since this is a liquidating distribution.

Thus, the correct choice is:

B. $150,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina

What was the basis of the land Katarina received in the exchange? Katarina's basis in the land she received in the exchange was $200,000, which was equal to its fair market value at the time of the transaction.
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