ExpertMedium1 markMultiple Choice
CPA · Question 34 · Area 3: Entity Tax Compliance
An S Corporation distributes property with a FMV of $100,000 and a basis of $60,000 to its sole shareholder. What is the tax consequence to the S Corporation?
An S Corporation distributes property with a FMV of $100,000 and a basis of $60,000 to its sole shareholder. What is the tax consequence to the S Corporation?
Answer options:
A.
No gain recognized.
B.
$40,000 Loss.
C.
$40,000 Gain recognized.
D.
$100,000 Gain.
How to approach this question
1. Corporate Rule: Distribution of appreciated property is treated as a sale to the shareholder at FMV.<br/>2. Calculate Gain: $100,000 (FMV) - $60,000 (Basis) = $40,000.<br/>3. S Corp Context: This gain is recognized by the S Corp and passed through to the shareholder's K-1.
Full Answer
C.$40,000 Gain recognized.✓ Correct
Under IRC §311(b), a corporation (C or S) recognizes gain on the distribution of appreciated property. Gain = $40,000. This gain flows through to the shareholder.
Common mistakes
Thinking S Corps can distribute property tax-free like partnerships.
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