Question

BIG Inc. distributed land to an individual shareholder in a nonliquidating distribution. On the date the land was distributed, BIG Inc.’s adjusted basis in the land was $20,000, the fair market value of the land was $75,000, and the land was encumbered by a $35,000 mortgage, which liability was assumed by the shareholder. The corporation’s earnings and profits were $300,000 on the last day of the year in which the distribution was made after taking into effect any impact of the distribution on the corporation’s earnings and profits. As a result of the distribution, how much is the amount of dividend income to the shareholder, and what is the shareholder’s basis in the distributed property?

A. Dividend income of $20,000 and basis of $20,000.

B. Dividend income of $40,000 and basis of $20,000.

C. Dividend income of $40,000 and basis of $40,000.

D. Dividend income of $40,000 and basis of $75,000.

Answer 1

The correct answer is D - Dividend income of $40,000 and basis of $75,000.

Explanation: The faair value of the land is $75,000 and the valueofmortgage on the land is $35,000. Hence, the value of the dividend is the net asset transferred which is $40,000.

Also, since the shareholder has computed his dividend income on basis of fair value of the land,the same value will become the basis of the property in the hands of the sahreholder.

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