ExpertMedium1 markMultiple Choice
CPA · Question 14 · Area II: Entity Tax Compliance
A C Corporation distributes land to its sole shareholder as a nonliquidating distribution. The land has a basis of $40,000 and a fair market value (FMV) of $90,000. The land is subject to a liability of $30,000 which the shareholder assumes. The corporation has ample Earnings & Profits (E&P). What are the tax consequences to the C Corporation?
A C Corporation distributes land to its sole shareholder as a nonliquidating distribution. The land has a basis of $40,000 and a fair market value (FMV) of $90,000. The land is subject to a liability of $30,000 which the shareholder assumes. The corporation has ample Earnings & Profits (E&P). What are the tax consequences to the C Corporation?
Answer options:
A.
No gain recognized.
B.
Recognize gain of $50,000.
C.
Recognize gain of $20,000.
D.
Recognize loss of $10,000.
How to approach this question
Treat the distribution as if the corporation sold the property to the shareholder at FMV. Gain = FMV - Basis. (If Liability > FMV, use Liability as FMV).
Full Answer
B.Recognize gain of $50,000.✓ Correct
B
IRC §311(b). The corporation recognizes gain on the distribution of appreciated property. Gain = FMV ($90,000) - Adjusted Basis ($40,000) = $50,000. The liability assumption affects the shareholder's basis and dividend amount, but not the corporation's gain unless the liability exceeded FMV.
Common mistakes
Thinking distributions are tax-free to the corporation; netting the liability against the gain.
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