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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.
How is E&P impacted?
Expert Answer
Answer :- Distribution of property by “C” corporation to its shareholders will be measured at the fair market value of property (as on the date of distribution of property by “C” corporation) in the hands of shareholders.
On the distribution of property by “C” corporation to its shareholders, Gain is recognized in the books of account of “C” corporation under section 311 (b) of Internal Revenue Code (IRC).
Earnings & Profits (E&P) of the corporation distributing property to its shareholders will be decreased by the higher of adjusted basis value of property or the fair market value of property.
