CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a domestic C corporation, distributed property with a fair market value (FMV) of $100,000 and an adjusted basis of $70,000 to its sole shareholder in a nonliquidating distribution. The corporation has adequate earnings and profits (E&P). What is the amount of gain recognized by the corporation on this distribution?
- A$70,000
- B$100,000
- C$0
- D$30,000
Show answer & explanationAnswer & explanation
Correct answer: D. $30,000
When a C corporation distributes appreciated property in a nonliquidating distribution, it must recognize gain as if it sold the property for its fair market value. The gain is the FMV ($100,000) less the adjusted basis ($70,000), resulting in a $30,000 gain.
Why the other options are wrong
- A. This represents the adjusted basis, not the gain recognized.
- B. This represents the fair market value, not the gain recognized.
- C. Incorrect; the corporation must recognize gain on appreciated property distributions.
C Corp Nonliquidating Property Distribution (Appreciated)
A C corporation distributing appreciated property in a nonliquidating distribution recognizes gain as if it had sold the property at its fair market value. It does not recognize loss if the property has depreciated.
- Corporation recognizes gain on appreciated property.
- Gain = FMV - Adjusted Basis.
- Losses are generally not recognized on depreciated property distributions.
Memory trick: Corporate Property: Gain for Appreciated, Loss Ignored!