Understanding Tax Consequences When Distribution is Treated as Sale of Shareholder's Stock and Corporation Recognizes Loss in Liquidation

This is a good corporate tax question! When a corporation liquidates completely under Section 331, the shareholders treat the receipt of property as payment in exchange for their stock (essentially a sale). So Rachel will recognize gain or loss based on the difference between the FMV of property received ($1.2M) and her stock basis. For the corporation, we need to look at Section 336, which states that a liquidating corporation recognizes gain or loss on property distributed in complete liquidation as if the property were sold at FMV. In this case, Zenith distributed Yellowfield (basis $1.5M, FMV $1.2M) to Rachel, so Zenith will recognize a $300k loss. The confusion might be coming from thinking about regular distributions versus liquidating distributions. In a non-liquidating context, different rules might apply, but in a complete liquidation, Section 336 specifically requires the corporation to recognize gain or loss.

I dealt with something similar in my own business and found a tool that saved me tons of time figuring out the tax treatment. I was confused about recognition of gains and losses in corporate liquidations and which code sections apply. I stumbled across https://taxr.ai when researching and uploaded my scenario details. The AI analyzed the tax code provisions and provided a clear explanation about Section 336 vs. Section 311 and when corporations recognize losses on distributions. What surprised me was how it walked through my specific situation step by step while citing the relevant code sections and regulations. For anyone dealing with corporate liquidations or other complex tax scenarios, it's been incredibly helpful - especially when you need to understand WHY a particular answer is correct rather than just memorizing rules.

Just wanted to follow up about my experience with taxr.ai after asking about it earlier. I decided to try it with a similar liquidation scenario I was working on for a client. I was honestly surprised by how well it handled the complexity. I uploaded details about a corporate liquidation with multiple shareholders receiving different properties, and it correctly identified which code sections applied (331, 336, etc.) and exactly how losses would be recognized or disallowed. It even highlighted the exceptions under 336(d) that I had overlooked regarding property contributed with built-in losses. The analysis saved me hours of research and helped me explain the tax consequences to my client with much more confidence. For anyone dealing with corporate tax questions like this one, it's definitely worth trying.

If anyone is trying to contact the IRS to get clarification on corporate liquidation rules, good luck! I spent 3 weeks trying to get through to someone who actually understood Section 336 and related party transactions. After wasting hours on hold, I used https://claimyr.com and got a callback from the IRS in under 2 hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was actually knowledgeable about corporate liquidations and confirmed that in complete liquidations, Section 336 overrides the general rules of Section 311, which is why the corporation recognizes the loss in this scenario. They also explained how the rules would be different if the property had been contributed within 5 years of the liquidation.

I want to apologize for my skepticism about Claimyr earlier. After posting my comment, I decided to give it a try since I was desperate for help with a corporate liquidation issue similar to this thread. I couldn't believe it when I got a call back from the IRS in about 90 minutes. The agent I spoke with walked me through the interaction of Sections 331, 336, and 267 for my situation. They confirmed that in a complete liquidation, the corporation does recognize losses even when distributing property to related shareholders who contributed it, with some exceptions under 336(d). I've been trying to reach someone at the IRS for weeks, and this saved me so much frustration. Just wanted to share my experience since my skeptical comment wasn't fair.

There's another nuance to this question that hasn't been mentioned yet. The problem states that Rachel contributed Yellowfield in a 351 exchange 7 years ago. Section 336(d)(2) has special rules for built-in losses on property contributed to a corporation, but those rules generally only apply to property contributed within 5 years of the liquidation. Since Rachel contributed the property 7 years ago, those anti-abuse provisions wouldn't apply here, which is another reason why answer D is correct. The full $300k loss would be recognized by the corporation.

This thread has been super helpful. One question I still have - what are the tax consequences for Brad in this scenario? I know the question focuses on Rachel and Zenith, but I'm curious how Brad's tax treatment works.

This is such a helpful discussion! I've been working through similar corporate liquidation problems and the distinction between Section 311 and Section 336 has been tricky for me. What really clicked from reading this thread is that the key is recognizing this is a *complete* liquidation, not just a regular distribution. In complete liquidations under Section 336, the corporation is treated as if it sold all its assets at fair market value, which is why Zenith recognizes the $300k loss on Yellowfield. I also appreciate the clarification about the 5-year rule under Section 336(d)(2). It makes sense that since Rachel contributed the property 7 years ago (outside the 5-year window), the full built-in loss can be recognized. If it had been within 5 years, only the post-contribution decline in value would be deductible. This really helps me understand why corporate liquidations have such different tax consequences compared to regular distributions. Thanks everyone for the detailed explanations!

This has been an incredibly educational thread! I'm studying for my tax certification and corporate liquidations have been one of my weakest areas. Reading through everyone's explanations really helped me understand the mechanics. What I found most valuable was learning about the interplay between different code sections. I initially thought Section 311's loss disallowance rule would apply here, but now I understand that Section 336 creates a completely different framework for complete liquidations. The "deemed sale at FMV" concept makes so much sense when you think about it - the corporation is essentially going out of business and disposing of all its assets. The discussion about the 5-year rule under Section 336(d)(2) was also enlightening. It's fascinating how the tax code has these anti-abuse provisions to prevent taxpayers from manufacturing losses through strategic property contributions followed by quick liquidations. For anyone else struggling with these concepts, I'd recommend focusing on identifying the type of transaction first (regular distribution vs. complete liquidation) as that determines which code section applies. Thanks to everyone who shared their knowledge - this community is such a great resource for learning complex tax concepts!

This discussion has been incredibly helpful for understanding corporate liquidation rules! I work in tax compliance and see these issues come up regularly with our corporate clients. One practical tip I'd add: when dealing with liquidation scenarios, always create a timeline of when assets were contributed versus when the liquidation occurs. The 5-year rule under Section 336(d)(2) that was mentioned is crucial for determining loss recognition, and it's easy to miss if you don't map out the dates carefully. Also, for anyone dealing with similar situations in practice, remember that Section 336 applies to ALL property distributed in a complete liquidation - not just the loss property. So in this case, Zenith would also recognize the $180k gain on Greenfield distributed to Brad ($780k FMV - $600k basis). The corporation essentially has a complete "deemed sale" of all assets at fair market value. Thanks to everyone who contributed to this thread - the explanations about why Section 336 overrides Section 311 in complete liquidations really clarified a concept I've struggled with!