Question 1

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?

Accepted Answer

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).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking distributions are tax-free to the corporation; netting the liability against the gain.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

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