CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, an S corporation, makes a nonliquidating distribution of land to its sole shareholder. The land has a fair market value (FMV) of $120,000 and an adjusted basis of $80,000 to the S corporation. The shareholder's basis in the S corporation stock is $150,000. What is the S corporation's recognized gain on this distribution?
- A$80,000
- B$0
- C$120,000
- D$40,000
Show answer & explanationAnswer & explanation
Correct answer: D. $40,000
An S corporation recognizes gain on the distribution of appreciated property as if it had sold the property at its fair market value. The gain is the difference between the FMV ($120,000) and the adjusted basis ($80,000).
Why the other options are wrong
- A. This is incorrect. This represents the adjusted basis of the property.
- B. This is incorrect. S corporations recognize gain on appreciated property distributions.
- C. This is incorrect. This represents the fair market value of the property.
S Corp Property Distribution Gain
An S corporation recognizes gain on the distribution of appreciated property as if it sold the property at its fair market value to the distributee.
- Gain is recognized at the corporate level.
- Gain passes through to shareholders.
- Losses are generally not recognized on depreciated property distributions.
- Shareholder's basis in distributed property is its FMV.
Memory trick: S Corp property, gain is recognized, shareholder basis gets FMV, that's the prize.