Question & Answer: Assume a “C” corporation makes a current distribution of appreciated pro…..

Assume a “C” corporation makes a current distribution of appreciated property to one of its shareholders. The property is subject to a liability that exceeds the property’s actual FMV. Please discuss the tax consequences of the distribution to both parties. You may want to use an example to illustrate the application of the rules.

Expert Answer

 

Tax Consequence of Property distribution by C Corporation to its Shareholders in the hands of Shareholders

While C Corporation ready to give dividend to its shareholders from any noncash item (Property), then the same is taxable in the hands of shareholders as dividend. Further if assets transferred as dividend is transferred along with any liability then dividend will reduced by the liability assumed by the shareholders from the fair market value of the assets.

If the liability assumed by the shareholders exceeds fair market value of the assets then dividend will be zero, as dividend cannot be negative amount.

Suppose C Corporation transfer an asset which has fair market value of $20,000 and tax base of the same is $18,000. Further liability attached with the assets has value of $21,000. In this case dividend amount will be zero as the liability amount is higher than fair market value of the assets.

Tax Consequence of Property distribution by C Corporation to its Shareholders in the hands of C Corporation

While C Corporation ready to give dividend to its shareholders from any assets, then the fair market value of the assets less tax base will be treated as capital gain in the hands of C corporation. If the liability attached to assets, exceeds asset fair market value then liability amount will be treated as deemed fair value of the assets and capital gain will be calculated accordingly.

Suppose C Corporation transfer an asset which has fair market value of $20,000 and tax base of the same is $18,000. Further liability attached with the assets has value of $21,000. In this case liability value will be deemed market value, accordingly capital gain will be $3000 ($21,000 – $18000).

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