A C Corporation distributes land to its sole shareholder as a dividend. The land has a basis of $20,000 and a FMV of $60,000. The corporation has ample E&P. What are the tax consequences to the corporation?

Answer options:

No gain or loss recognized.

$40,000 loss.

$60,000 gain.

$40,000 gain.

How to approach this question

Rule: When a Corp distributes appreciated property, it recognizes gain as if it sold it for FMV. Gain = FMV - Basis.

Full Answer

D.$40,000 gain.✓ Correct

Under IRC §311(b), a corporation recognizes gain on the distribution of appreciated property as if the property were sold to the shareholder at its fair market value. Gain = $60,000 - $20,000 = $40,000.

Common mistakes

Thinking distributions are tax-free to the corporation.

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