A sole shareholder receives a piece of land from a corporation as a dividend distribution.The land has a basis of $40,000 and a fair market value of $80,000; the shareholder's basis in his stock is $20,000, and this distribution is the only corporate activity for the year except for paying any tax owed on the land distribution.At the beginning of the year, the corporation had only $5,000 in accumulated earnings and profits.How will this distribution be treated for tax purposes by the shareholder?

Question

Quizplus · Accepted Answer

The distribution is first treated as a dividend to the extent of the corporation's accumulated earnings and profits ($5,000), then as a return of capital to the extent of the shareholder's basis in the stock ($20,000), and finally as a capital gain for the remaining amount ($55,000). However, the total distribution is the fair market value of the land ($80,000), so the correct breakdown is $5,000 dividend (from earnings and profits), $20,000 return of capital (reducing the basis in the stock to zero), and the remaining $55,000 as a capital gain. The choice provided does not exactly match this calculation, indicating a potential misunderstanding in the question's construction or a typographical error in the choices.

A Sole Shareholder Receives a Piece of Land from a Corporation