Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?
A) Rust has a gain of $15,000 and Andre has dividend income of $350,000.
B) Rust has a gain of $145,000 and Andre's basis in the distributed property is $130,000.
C) Rust has a gain of $130,000 and Andre's basis in the distributed property is $350,000.
D) Rust has a gain of $145,000 and Andre has dividend income of $130,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Rust Corporation recognizes a gain of $145,000, which is the difference between the fair market value of the property ($350,000) and its adjusted basis ($205,000). Andre's dividend income is the fair market value of the property ($350,000) minus the liability assumed ($220,000), resulting in $130,000.

Rust Corporation Distributes Property to Its Sole Shareholder, Andre