ExpertHard1 markMultiple Choice
CPA · Question 56 · Area V: Entity Taxation
A C Corporation distributes land to a shareholder as a dividend. The land has a FMV of $50,000 and is subject to a liability of $60,000 that the shareholder assumes. The corporation's basis in the land is $20,000. What is the gain recognized by the corporation?
A C Corporation distributes land to a shareholder as a dividend. The land has a FMV of $50,000 and is subject to a liability of $60,000 that the shareholder assumes. The corporation's basis in the land is $20,000. What is the gain recognized by the corporation?
Answer options:
A.
$30,000
B.
$0
C.
$40,000
D.
$10,000
How to approach this question
Corp Distribution Rule: Gain = FMV - Basis. EXCEPTION: If Liability > FMV, treat the Liability amount as the FMV. $60k (Liab) - $20k (Basis) = $40k Gain.
Full Answer
C.$40,000✓ Correct
Under IRC §311(b), if distributed property is subject to a liability in excess of its FMV, the FMV is treated as being not less than the amount of the liability. Deemed FMV = $60,000. Basis = $20,000. Gain = $40,000.
Common mistakes
Using the actual FMV ($50k) instead of the liability amount.
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