CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a C corporation, distributed property with a fair market value (FMV) of $150,000 and an adjusted basis of $100,000 to its sole shareholder. The corporation also has current Earnings and Profits (E&P) of $70,000 and accumulated E&P of $30,000. What is the amount of gain recognized by the C corporation on this distribution?
- A$70,000
- B$150,000
- C$0
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: D. $50,000
A C corporation recognizes gain on the distribution of appreciated property to its shareholders as if the property were sold to the shareholder at its fair market value. The gain is the difference between the FMV and the adjusted basis of the property. E&P balances are relevant for the shareholder's income, not the corporation's recognized gain.
Why the other options are wrong
- A. Incorrect. This is the amount of current E&P, which is not the corporation's recognized gain.
- B. Incorrect. This is the FMV of the property, not the recognized gain.
- C. Incorrect. Corporations recognize gain on appreciated property distributions.
C Corp Property Distribution Gain
A C corporation recognizes gain (but not loss) on the distribution of appreciated property to its shareholders as if the corporation sold the property at its fair market value (FMV) at the time of distribution. The gain is FMV minus the adjusted basis.
- Gain recognized = FMV - Adjusted Basis.
- Losses are generally not recognized on distributions to shareholders.
- Applies to nonliquidating distributions.
- Increases the corporation's E&P.
Memory trick: When a Corp 'gifts' appreciated assets, it 'sells' them first.