A C Corporation distributes a property dividend to a shareholder. The property has an FMV of $100,000 and a basis of $140,000. The corporation has sufficient E&P. What are the tax consequences to the corporation?

Answer options:

$40,000 loss is recognized.

No loss is recognized.

$40,000 loss is deferred.

$40,000 gain is recognized.

How to approach this question

Rule: Corps recognize GAIN on distribution of appreciated property, but CANNOT recognize LOSS on distribution of depreciated property (unless liquidating).

Full Answer

B.No loss is recognized.✓ Correct

IRC §311(a) states that no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of property. While §311(b) overrides this for gains, there is no override for losses. The loss is permanently lost.

Common mistakes

Treating loss property the same as gain property.

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