Tax Consequences of Liquidating Distribution to Scarlet Corporation and Jake

Tax Consequences of Liquidating Distribution to Scarlet Corporation and Jake

Scarlet Corporation:
  • The Long-term capital loss (Scarlet Corporation recognize) = Fair market value - Basis
  • The Long-term capital loss (Scarlet Corporation recognize) = $390,000 - $425,000
  • The Long-term capital loss (Scarlet Corporation recognize) = $35,000
Jake:
  • The Long-term capital gain (Jake recognize) = (Fair market value of land - Liability) - Basis of stock
  • The Long-term capital gain (Jake recognize) = ($390,000 - $250,000) - $60,000
  • The Long-term capital gain (Jake recognize) = $80,000
Explanation:

From the questions given we find the following, the consequences of tax for the distribution liquidating to Jake and Scarlet Corporation. The Long-term capital gain for Jake is $80,000, while Scarlet Corporation recognizes a Long-term capital loss of $35,000. However, Jake considered the basis of $390,000 for the land distributed.

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