Lesson 5B
11/11/08
Property Distributions-Property Not Subject to Liability

I.  Appreciated Property
	
A.	Tax Consequences to Corporation

1.	Corporation recognizes gain as if the property was sold at fmv and the cash distributed to the shareholder.

2.	Corporation’s e&p is increased by the gain (net of taxes that will be due), then decreased by the fair market value of the property distributed.

B.	Tax Consequences to Shareholder

1.	Amount of distribution is the fmv of the property

2.	Distribution is treated as dividend if corporation has sufficient e&p, otherwise return of capital or capital gain.

3.	Shareholder takes fmv basis in distributed property and new holding period begins.

II. Depreciated (i.e. Loss) Property

A.	Tax Consequences to Corporation

1.	Corporation does not recognize loss.  

2.	Corporation’s e&p decreases by the adjusted basis of the distributed property.

B.	Tax Consequences to Shareholder

1.	Amount of distribution is fmv of property.

2.	Distribution is treated as dividend if corporation has sufficient e&p, otherwise return of capital or capital gain.

3.	Shareholder takes fmv basis in distributed property and new holding period begins.