ExpertHard1 markMultiple Choice
CPA · Question 41 · Area V: Entity Taxation
A C corporation distributes land to a shareholder as a dividend. The land has an adjusted basis of $20,000 and a fair market value of $50,000. The land is subject to a liability of $10,000, which the shareholder assumes. What is the amount of gain recognized by the corporation?
A C corporation distributes land to a shareholder as a dividend. The land has an adjusted basis of $20,000 and a fair market value of $50,000. The land is subject to a liability of $10,000, which the shareholder assumes. What is the amount of gain recognized by the corporation?
Answer options:
A.
$0
B.
$30,000
C.
$20,000
D.
$40,000
How to approach this question
Corp Distribution Rule: Treat as if sold for FMV. Gain = FMV - Basis.
Full Answer
B.$30,000✓ Correct
B
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 = $50,000 - $20,000 = $30,000.
Common mistakes
Thinking the liability reduces the gain recognized by the corporation (it affects the shareholder's basis/income, not the corp's gain, unless Liab > FMV).
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