The proceeds from the asset sale went into the business and then a shareholder distribution was made.

The gain from the sale of assets (primarily LTCG) and distribution was reflected on the final K-1 and was properly accounted for in arriving at the $226k ending stock basis.  The K-1 LTCG pass through is $454K, more than enough to absorb the stock loss.

The shareholder had bought the business 25 years ago at $275k and had not eroded that much basis with limited S/H distributions.

Hope that helps.