The correct answer is c$.$ $$0.$

## Explanation

Generally, a corporation recognizes gain or loss on a liquidating distribution as if the property were sold at its fair market value $(336($a$)).$ However, tax law includes rules to prevent the recognition of certain losses.

In this case, the loss is disallowed by the related$-$party rule of $336($d$)(1).$ This rule states that a corporation cannot recognize a loss on a distribution to a related person if the property is "disqualified property." Let's break down why this rule applies here:

Related Person: The shareholders are two brothers who each own $50\%$ of the corporation. Due to stock attribution rules $(267),$ each brother is considered to own $100\%$ of the stock, making them "related persons" to the corporation.

Disqualified Property: Property is considered "disqualified" if it was acquired by the corporation in a tax$-$free transfer $($like a $351$ transaction or a contribution to capital$)$ within the five$-$year period leading up to the liquidation.

The property was contributed to Toucan Corporation four years ago as a contribution to capital, which falls within the five$-$year window.

Because the property is disqualified property being distributed to related persons, Toucan Corporation cannot recognize any of the loss. The potential loss of $$160,000($$$200,000$ basis $-$ $$40,000$ FMV$)$ is completely disallowed.