Question

Shazam Corporation had book income in 2017 of $100,000. At the end of 2017, Shazam distributes two separate properties it owned to its sole owner, Sheldon. Property number 1 had basis of $30,000 and a fair market value at the date of distribution of $20,000. Property number 2 also had basis of $25,000 but a fair market value of $40,000. How much taxable income will Shazam and Sheldon each have due to these distributions?

a.      $0 and $0

b.     $15,000 and $55,000

c.      $15,000 and $60,000

d.     $5,000 and $60,000

Answer 1

the answer is option C) $ 15,000 and $ 60,000

Explanation

For Shazam Corporation the distribution of property will be considered as if it made a sale at fair value of property. But no loss will be recognised

In case of property 1 the fair value is less than basis of property so it is deemed to have been sold a lost and loss will not be recognised.

In case of property 2 the fair value is $ 15,000 in excess of Basis. so the income will be $ 15,000

The taxable income for Sheldon will be = $ 20,000 + $ 40,000 = $ 60,000