Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $427,500. Packard's basis in the State stock was $625,000. The land had a basis to State Company of $535,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives

$107,500

Explanation:

There is No loss recognized by State and a basis in the land of $535,000 to Packard.

The State does not recognize the loss of $107,500 because the liquidation is tax-deferred to Packard. Packard's basis in the land is equal to State's basis in the land.

No loss or gain is recognized by State Company and Packard's basis in the land will be $535,000

Explanation:

State Company does not have to recognize any loss or gain regarding the distribution of the land. Packard's basis for the land will be equal to State's basis = $535,000.

Since the liquidation involves 100% of the company's stocks, section 332 applies. This means that no gain or loss must be recognized by State Company.