Last year Level 3, Inc acquired land and inventory in Section 351 tax-free exchange. On the date of the exchange, the land had a basis of $700,000 and an FMV of $900,000. The inventory had a basis of $100,000 and an FMV of $250,000.

L3 has two shareholders, Livia and Evelyn. Livia owns 60%, and Evelyn owns 40%. L3 is going to liquidate this year (on 12/31). The value of the land is now $400,000, and the inventory has a value of $350,000.

What should L3 do:

Distribute all of the land to Livia?

Distribute all of the land to Evelyn?

Distribute 60% of the land to Livia (the other 40% to Evelynn)?

Distribute the land 50-50?

Sell the land and distribute the cash of $400,000 to the shareholders?