Identify which of the following statements is true. Group of answer choices Section 336 prevents recognition of a loss when making a pro rata distribution of property to a related person. A liquidating distribution of property other than a disqualified property that is made ratably to all shareholders (based on their stockholdings) will permit the recognition of loss on the portion of the distribution that is made to a related person. All of the above are false. A subsidiary corporation can recognize losses on distributions to either the parent corporation or minority shareholders in a Sec. 332 liquidation.

A liquidating distribution of property other than a disqualified property that is made ratably to all shareholders (based on their stockholdings) will permit the recognition of loss on the portion of the distribution that is made to a related person.

Explanation: Under Section 331,

A liquidating distribution is considered to be full payment in exchange for the shareholder’s stock and not a dividend distribution, to the extent of the corporation’s earnings and profits . The shareholders generally recognize gain or loss in an amount equal to the difference between the fair market value of the assets received ie cash or property and the adjusted basis of the stock surrendered. If the stock is a capital asset in the shareholder’s hands, the transaction qualifies for capital gain or loss treatment.

If the corporation sells its assets and distributes the sales proceeds, shareholders recognize gain or loss when they receive the liquidation proceeds in exchange for their stock. If the corporation still distributes its assets for later sale by the shareholders, the assets would come out of the corporation with a basis related to recognition of gain or loss.

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