CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, an S corporation, distributes land with a fair market value (FMV) of $150,000 and an adjusted basis of $100,000 to its sole shareholder. The shareholder's basis in their S corporation stock before the distribution was $200,000. What is the S corporation's recognized gain on this distribution?
- A$0
- B$100,000
- C$150,000
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: D. $50,000
An S corporation recognizes gain (but not loss) on the distribution of appreciated property as if it had sold the property for its FMV. The gain is FMV ($150,000) - Adjusted Basis ($100,000) = $50,000.
Why the other options are wrong
- A. Incorrect; S corporations recognize gain on appreciated property distributions.
- B. This is the adjusted basis of the property, not the gain.
- C. This is the FMV of the property, not the gain.
S Corp Property Distribution Gain
An S corporation recognizes gain on the distribution of appreciated property to its shareholders as if it had sold the property for its fair market value (FMV).
- The gain flows through to shareholders and increases their stock basis.
- Losses on distributed property are generally not recognized by the S corporation.
- This rule prevents appreciated property from escaping taxation at the corporate level upon distribution.
Memory trick: Appreciated Assets Always Generate Gains.