An S Corporation distributes property with a fair market value of $50,000 and an adjusted basis of $30,000 to its sole shareholder. What is the tax consequence to the S Corporation?

Answer options:

No gain or loss is recognized.

$20,000 gain is recognized and flows through to the shareholder.

$20,000 gain is recognized but taxed at the corporate level only.

The shareholder takes a basis of $30,000 in the property.

How to approach this question

Treat property distribution as a SALE to the shareholder for FMV. Gain = FMV - Basis. This gain flows through to the shareholder.

Full Answer

B.$20,000 gain is recognized and flows through to the shareholder.✓ Correct

Under IRC §311(b), a corporation (C or S) recognizes gain on the distribution of appreciated property as if the property were sold to the shareholder at its FMV. For an S Corp, this gain ($20,000) flows through to the shareholder on the K-1.

Common mistakes

Thinking distributions are tax-free to the entity.

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