CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, an S corporation, distributes land with a fair market value (FMV) of $100,000 and an adjusted basis of $70,000 to its sole shareholder. The shareholder's stock basis before the distribution is $150,000. Assuming the S corporation has no accumulated earnings and profits (AE&P), what is the shareholder's recognized gain from the distribution?
- A$70,000
- B$100,000
- C$0
- D$30,000
Show answer & explanationAnswer & explanation
Correct answer: D. $30,000
When an S corporation distributes appreciated property, it recognizes gain as if it sold the property for its FMV. The S corporation recognizes a $30,000 gain ($100,000 FMV - $70,000 basis). This gain passes through to the shareholder, increasing their stock basis.
Why the other options are wrong
- A. This is the adjusted basis of the land, not the recognized gain.
- B. This is the fair market value of the land, not the recognized gain.
- C. This would be incorrect as the S corporation must recognize gain on appreciated property distributions.
S Corp Property Distribution Gain
An S corporation recognizes gain on the distribution of appreciated property as if it sold the property for its fair market value.
- Gain recognized equals FMV - Adjusted Basis
- Recognized gain passes through to shareholders
- Losses on distributed property are generally not recognized by the S corp
Memory trick: S-Corp's gift, if it's worth more, a gain is recognized, for sure.