Gains or losses are typically recognized by shareholders in a liquidating distribution of a C corporation based on the fair market value (FMV) of the distributed property. This is measured against their basis in the corporation's stock. Here's a summary:

Acknowledging Gain or Loss:

• In the event that the FMV of the property distributed is greater than the shareholder's basis in the stock, they will receive a capital gain.
• In contrast, when the FMV is less than the basis, the shareholder may realize a capital loss.

The characteristics of the gain/loss:

Since the gain or loss is derived from the sale or exchange of stock, it's commonly referred to as a capital gain or loss.

The tax treatment (long-term or short-term) is determined by the shareholder's holding time for the stock.

The basis for the Fair Market Value:

Regardless of their stock basis, shareholders acquire a basis in the distributed property that is equal to its FMV at the time of distribution.

Taxable Event:

If the corporation realizes gains on appreciated property distributed, liquidating distributions are taxable events for both itself and the shareholders receiving the distribution.

To illustrate how to treat C corporation distributions during liquidation, here is an example:

'A' had two blocks of 'L' corporation stock that possessed the following characteristics:

• On January 1st, year 1, Block 'One' 200 shares were acquired for $20,000.
• On July 2nd, Block 'Two' 50 shares were purchased at a price of $12,500.

'A' owned two blocks of stock that comprised 10% of L's overall stock. In exchange for her 250 shares, 'A received a $50,000 cash distribution on December 1st, year 2. L's earnings and profits balance was $50,000 at the time of liquidation distributions. What is the adequacy and nature of an 'A'''s gain or loss?

Solution with Explanation:

• Total basis of 250 shares prior to sale is $20,000 + $12,500 = $32,500.
• Total selling price iis $50,000
• Hence, the profit from 250 shares is $17,500 ($32,500 - $50,000).

Now, we will determine the long-term capital gain or loss for each block 1 and 2, as follows:

$50,000/250 = $200 each share was sold. Therefore selling price of stock "1" is $40,000 ($200 x 200 shares) and block "2" $200, x 50 shares = $10,000.

Basis of block one is $20,000 - selling price $40,000 = $20,000 Long term gain long term.

Bais of block two is $12,500 - Selling price is $10,000 = $2,500 short term loss.