H Corp. distributed land with a fair market value of $100,000 (basis $20,000) to
ID: 2598769 • Letter: H
Question
H Corp. distributed land with a fair market value of $100,000 (basis $20,000) to Tina, a 70% shareholder. Determine the amount of the dividend and basis of the land to Tina if E&P is $80,000. A.) Dividend:$80,000; Basis in the land:$100,000 B.) Dividend:$80,000; Basis in the land:$80,000 C.) Dividend:$100,000; Basis in the land:$100,000 D.) Dividend:$100,000; Basis in the land:$20,000
The option D.) is the correct option. In Case instead of the dividend of $100,000 FMV land with a basis of $20,000 is distributed, the shareholder has to recognize the FMV of land as dividend income. So, the Dividend is $100,000 and the basis of the land is $20,000
(1) Comments please explain why shareholder has to recognize the $100,000. Dividend: $80,000 and basis $80,00 (100,000 - $20,000)
Explanation / Answer
The amount of distribution is considered as dividend unless Tina has complete value of 100,000 as E&P to cover the FMV. In this case Tina has to recognize only 80,000 as dividend. And Excess FMV value over E&P to the extent of 20,000 will be considered as non taxable return of captial.
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