[Anonymous]

yle Corp. owned 100 shares of Beta Corp. stock that it bought in 1993 for $9 per share. In 2014, when the fair market value of the Beta stock was $20 per share, Nyle distributed this stock to a noncorporate shareholder.

Nyle’s recognized gain on this distribution was

A. $2,000

B. $1,100

C. $900

D. $0

B, 1100. Corporations recognize taxable gains but not losses from nonliquidating distribution of appreciable property to their shareholders. The transaction is viewed as if the corporation sold the property to its shareholders at its fair market value on the day of the distribution.

Hence, Nyle Corp. would recognize a gain of $1,100, the fair market value of the Beta stock (100 shares multiplied by $20 per share) less its basis in the stock (100 shares multiplied by $9 per share).

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If a corporation makes a stock distribution without getting anything in return, why does that count as a gain?

[Kimboroni]

Gains and losses are generally recognized based on what benefits the IRS and what the IRS wants, not the taxpayer. So if the property has appreciated so that the corp is distributing something worth more than they paid for it, there is a perceived gain (remember that they could distribute cash, and it would only be $900 in cash if they distributed something equal to their basis in the stock– but they are choosing to distribute stock worth $2000 instead, so that would be the cash value to the shareholder).

A loss on nonliquidating distribution is not allowed, since the IRS likes to maximize gains and minimize losses.

It also affects the shareholder's basis if there is a gain on distribution.

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