Blackwing Corp. is owned by X and Y, who are unrelated. X owns 20% and Y owns 80% of the stock of the corporation. Blackwing’s asset before liquidation were Cash $300,000, Equipment with adjusted basis of $75,000 and FMV of $100,000 and Building with adjusted basis of $200,000 and FMV of $100,000. On liquidation, Blackwing distributes the assets as follows: Equipment to X; Cash and Building to Y.
- Blackwing Corp and X are unrelated parties, Blackwing Corp and Y are related parties, Blackwing will recognize gain on equipment of $25,000 loss on building of $100,000. – A corporation and a shareholder are considered related parties, if the shareholder owns (directly or indirectly) more than 50% in the value of the corporation’s outstanding stock. In this case X is unrelated to Blackwing corporation as X owns less than 50% interest. Accordingly, Blackwing will recognize gain on the distribution of equipment to X of $25,000 (FMV $100,000 – Basis $75,000). On the other hand, Y owns 80% of Blackwing corporation and are considered related parties. Generally, losses between related parties are disallowed. However, in the event of complete liquidation of a corporation, the loss is allowed to the corporation. Accordingly, the loss on distribution of building to Y of $100,000 (FMV $100,000 – Basis $200,000) is allowed.