ExpertHard1 markMultiple Choice
CPA · Question 33 · Area V: Entity Taxation
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?
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:
A.
No gain or loss recognized.
B.
$40,000 loss.
C.
$60,000 gain.
D.
$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
D
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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