ExpertHard1 markMultiple Choice
CPA · Question 48 · Area III: Entity Tax Planning
Two individuals form an entity. A contributes cash. B contributes appreciated property (Basis $10k, FMV $100k) for a 50% interest. B wants to avoid immediate gain recognition but wants the flexibility to distribute the property back to himself tax-free in the future if the business dissolves. Which entity is best?
Two individuals form an entity. A contributes cash. B contributes appreciated property (Basis $10k, FMV $100k) for a 50% interest. B wants to avoid immediate gain recognition but wants the flexibility to distribute the property back to himself tax-free in the future if the business dissolves. Which entity is best?
Answer options:
A.
C Corporation
B.
S Corporation
C.
Partnership
D.
None allow tax-free distribution.
How to approach this question
Analyze exit strategies. Corporations (C or S) trigger gain on distribution of appreciated property (IRC §311/§336). Partnerships generally do not (IRC §731).
Full Answer
C.Partnership✓ Correct
C
IRC §731 generally allows tax-free distributions of property from a partnership (basis carries over). Corporations recognize gain under §311(b) or §336.
Common mistakes
Assuming S Corps allow tax-free property distributions.
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