Problem related to tax-free exchange


Pink Corporation acquired land and securities in a § 351 tax-free exchange in 2009. On the date of the transfer, the land had a basis of $1.7 million and a fair market value of $1.9 million, and the securities had a basis of $50,000 and a fair market value of $300,000. Pink Corporation has two shareholders, Maria and Paul, who are unrelated. Maria owns 70% of the stock in the corporation, and Paul owns 30%. Pink adopts a plan of liquidation in 2010. On this date, the value of the land has decreased to $700,000. What is the effect of each of the following on Pink Corporation? Which option should be selected? Please explain your answers.

a. Distribute all the land to Maria.

b. Distribute all the land to Paul.

c. Distribute 70% of the land to Maria and 30% to Paul.

d. Distribute 50% of the land to Maria and 50% to Paul.

e. Sell the land and distribute the proceeds of $700,000 proportionately to Maria and to Paul.

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Accounting Basics: Problem related to tax-free exchange
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