Lesson 5B
11/11/08
Property Distributions-Property 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.	If property is subject to a liability, the fmv of the property will be deemed to be not less than the liability.

3.	Corporation’s e&p is:
i.	increased by the gain (net of taxes that will be due),
ii.	increased again by the amount of the liability transferred to the shareholder, then 
iii.	decreased by the full fair market value of the property distributed (not reduced by the liability).

B.	Tax Consequences to Shareholder
1.	Amount of distribution is the fmv of the property, reduced by the liability assumed by the shareholder.

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 (not reduced by the liability) 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:
i.	Increases by amount of liability transferred to shareholder, then
ii.	decreases by the adjusted basis of the distributed property.

B.	Tax Consequences to Shareholder
1.	Amount of distribution is fmv of property, reduced by the liability assumed by the shareholder.

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 (not reduced by the liability) and new holding period begins.