CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, a C corporation, distributes marketable securities to its sole shareholder as a nonliquidating distribution. The securities have a fair market value (FMV) of $75,000 and an adjusted basis of $60,000 to the corporation. What amount of gain must the corporation recognize on this distribution?
- A$60,000
- B$75,000
- C$15,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: C. $15,000
A C corporation recognizes gain, but not loss, on the distribution of appreciated property in a nonliquidating distribution. The gain is the difference between the fair market value and the adjusted basis of the property.
Why the other options are wrong
- A. This is incorrect. This represents the adjusted basis, not the gain.
- B. This is incorrect. This represents the fair market value, not the gain.
- D. This is incorrect. Corporations recognize gain on appreciated property distributions.
C Corp Nonliquidating Property Distribution Gain
A C corporation recognizes gain (but not loss) on the distribution of appreciated property to its shareholders in a nonliquidating distribution.
- Gain recognized equals FMV minus adjusted basis.
- Losses are generally not recognized.
- Applies to nonliquidating distributions.
Memory trick: Gain on corporate property, but losses are ignored, a common tax story.