Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Zs adjusted basis for this building is $1,500. All of Zs stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is$1250 and on $3,000 gained is $1,000. Z adopts a plan of complete liquidation instead of selling the building to D. Z distributes the building to C in-kind pursuant to the plan. C then sells the building to D for $3,000 in cash with D taking subject to the mortgage of $2,000.

a. Section 336 treats Z as selling the building to C for $5,000.

b. Z will recognize $3,500 gain which is probably ordinary under Section 1239.

c. C will take the property subject to both $2,000 mortgage and most likely a $1,250 tax due from Z to the IRS.

d. Cs basis will be the fair market value of $5,000 under Section 334(a).

e. All of the above.

Please explain why you choose this answer.