Question

Ima Lone, the sole shareholder of Lone Star, Inc, a S corporation, receives a distribution of corporate land (fmv $50,000, basis $30,000); her corporate basis is $40,000. Explain the effect on the corporation and the shareholder.

Answer 1

The effect of the distribution of corporate land will be as follows:

a) Effect on corporation: Since the FMV of corporate land is more than its adjusted basis ($50,000>$30,000), hence this will be treated as distribution of apprepciated property and hence Lone Star, Inc will recognize gain on transaction in the same manner as if Lone Star, Inc had sold the property to Ima Lone at its FMV.

Hence Lone Star, Inc will report a capital gain of $20,000 for tax purposes.

b) Effect on Ima Lone:

Tax basis of distributed corporate land for Ima Lone = FMV of land = $50,000

Now, tax basis for Ima Lone in S corp would be equal to 0 and Ima Lone will also have to report a gain of $10,000 ($50,000 - $40,000) since the FMV of land ($50,000) is more than her corporate basis in Lone Star, Inc ($40,000).