An S Corporation distributes property with a fair market value of $50,000 and an adjusted basis of $70,000 to its sole shareholder. What is the tax treatment for the S Corporation regarding this distribution?

Answer options:

No loss is recognized.

Loss of $20,000 is recognized and passes through to the shareholder.

Loss of $20,000 is recognized but suspended at the corporate level.

Gain of $20,000 is recognized.

How to approach this question

Rule: Corporations (C or S) recognize gains on distribution of property, but DO NOT recognize losses on nonliquidating distributions.

Full Answer

A.No loss is recognized.✓ Correct

IRC §311(a) (applied to S Corps via §1371). No loss is recognized by a corporation on the distribution of property with a basis exceeding its fair market value. The loss is effectively lost (step-down in basis for shareholder to FMV).

Common mistakes

Thinking S Corps can pass through the loss on distribution; confusing liquidating (loss allowed) vs nonliquidating (loss disallowed).

Question 15 All questions Question 17

Practice the full CPA TCP Practice Exam 5

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive is granted an Incentive Stock Option (ISO) to purchase 1,000 shares of co...Medium Q02A taxpayer has a $500,000 interest-free loan from their employer outstanding for the entire Year ...Medium Q03A taxpayer wants to donate stock held for 5 years to a public charity. The stock has an adjusted ...Medium Q04An individual taxpayer had an AGI of $160,000 in Year 1 and a tax liability of $30,000. In Year 2...Medium Q05A taxpayer invests $50,000 cash for a 20% interest in a partnership. The partnership takes out a ...Hard

View all 68 questions →