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 to the corporation of $60,000. The corporation has current E&P of $100,000. What is the corporation's recognized gain on this distribution?
- A$15,000
- B$60,000
- C$0
- D$75,000
Show answer & explanationAnswer & explanation
Correct answer: A. $15,000
A C 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 ($75,000) - Adjusted Basis ($60,000) = $15,000.
Why the other options are wrong
- B. This is the adjusted basis of the property, not the gain.
- C. Incorrect; C corporations recognize gain on appreciated property distributions.
- D. This is the FMV of the property, not the gain.
C Corp Nonliquidating Property Distribution Gain
A C corporation recognizes gain on the distribution of appreciated property (FMV > adjusted basis) to its shareholders in a nonliquidating distribution.
- The gain recognized is the difference between the property's FMV and its adjusted basis.
- The corporation does not recognize loss on the distribution of depreciated property.
- The recognized gain increases the corporation's earnings and profits (E&P).
Memory trick: FMV Fails, Basis Builds, Gain Goes Global.