Question 1

A C Corporation distributes land to its sole shareholder as a nonliquidating distribution. The land has a Fair Market Value (FMV) of $500,000 and an adjusted basis to the corporation of $300,000. The land is subject to a liability of $200,000 which the shareholder assumes. The corporation has ample Earnings & Profits (E&P). What is the recognized gain for the corporation?

Accepted Answer

Treat the distribution as if the corporation sold the property to the shareholder at FMV. Gain = FMV - Basis. The liability affects the shareholder's dividend amount, not the corporation's gain (unless Liability > FMV).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Reducing the corporation's gain by the liability assumed.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 2

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