Carolina Corporation, an S corporation, has no corporate E&P from its years as a
ID: 2526494 • Letter: C
Question
Carolina Corporation, an S corporation, has no corporate E&P from its years as a C corporation. At the end of the year, it distributes a small parcel of land to its sole shareholder, Shadiya. The fair market value of the parcel is $95,200 and its tax basis is $58,000. Shadiya’s basis in her stock is $23,000. Assume Carolina Corporation reported zero taxable income before considering the tax consequences of the distribution. (Leave no answer blank. Enter zero if applicable.)
d. Assume the fair market value of the land is $39,400 rather than $95,200. How much gain must Shadiya recognize (if any) as a result of the distribution, what is her basis in her Carolina Corporation stock after the distribution, and what is her basis in the land?
Gain Recognized:
Stock Basis:
Land Basis:
Explanation / Answer
Shadiya would recognize a net gain of $ 16,400 on the liquidating distribution. First, she allocated the $18600 loss(58000 - 39400) on the distribution that Carolina Corporation recognizes. This loss reduces her stock basis from $23,000 to $4400. Second, she recognizes a $35,000 gain because the $39400 distribution exceeds her $4400 stock basis by $35,000. Thus, Shadia recognizes a net gain of $16,400 ($18600 loss allocated from Carolina Corporation plus $35,000 gain from the distribution in excess of basis).
Shadia’s basis in the land is $39,400, its fair market value.