ExpertMedium1 markMultiple Choice
CPA · Question 13 · Area II: Entity Tax Compliance
A C Corporation distributes land to its sole shareholder as a nonliquidating distribution. The land has a Fair Market Value (FMV) of $500,000 and an adjusted basis to the corporation of $300,000. The land is subject to a liability of $200,000 which the shareholder assumes. The corporation has ample Earnings & Profits (E&P). What is the recognized gain for the corporation?
A C Corporation distributes land to its sole shareholder as a nonliquidating distribution. The land has a Fair Market Value (FMV) of $500,000 and an adjusted basis to the corporation of $300,000. The land is subject to a liability of $200,000 which the shareholder assumes. The corporation has ample Earnings & Profits (E&P). What is the recognized gain for the corporation?
Answer options:
A.
$0
B.
$200,000
C.
$300,000
D.
$100,000
How to approach this question
Treat the distribution as if the corporation sold the property to the shareholder at FMV. Gain = FMV - Basis. The liability affects the shareholder's dividend amount, not the corporation's gain (unless Liability > FMV).
Full Answer
B.$200,000✓ Correct
Under IRC §311(b), a corporation recognizes gain on the distribution of appreciated property as if it were sold to the distributee at its fair market value. Gain = $500,000 (FMV) - $300,000 (Basis) = $200,000. The liability assumed by the shareholder reduces the dividend amount to the shareholder but does not reduce the gain recognized by the corporation.
Common mistakes
Reducing the corporation's gain by the liability assumed.
Practice the full CPA TCP Practice Exam 2
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...MediumQ02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...MediumQ03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...HardQ04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...MediumQ05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium