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Becker: MCQ #96 of C-Corp
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?
Brisk Taxable Income | Shareholder Taxable Income
a) increase | no change
b) no change | decrease
c) no change | no change
d) increase | decrease“Correct” answer: A
My Answer: Not Listed – Increase/IncreaseExplanation for A –
If Brisk Corp. were to distribute $200,000 of accumulated earnings and profits in cash as a dividend, the shareholder would recognize $200,000 in dividend income, and the corporation would reduce its earnings and profits by $200,000. If, instead, the dividend were the $200,000 FMV land with a basis of $75,000, the shareholder would still recognize $200,000 of dividend income (the FMV of the property received, as per the above rule), but the corporation would recognize a gain of $125,000 on the distribution ($200,000 FMV – $75,000 basis, per the above rule), the corporation’s earnings and profits would increase $125,000, and the corporation would reduce its earnings and profits by the $200,000 dividend distribution. Thus, Brisk’s taxable income would increase if the land were distributed, but the shareholder’s taxable income would not change.Rule: The taxable amount of a dividend to a shareholder from a corporation’s earnings and profits is the amount received in cash or the fair market value of the property received.
Rule: The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is of appreciated property, the corporation recognizes gain as if the property were sold at fair market value.
__________________________________________________________**My understanding & per BECKER book (C-Corp page 44)**: When a corporation distributes appreciated property, a gain to the corp is recognized as if it were “sold”, which would be FMV – NBV = Gain recognized. THEN, then shareholder would recognized the FMV of property received as dividend income.
SOOOOOOOO….. how is the answer A if they both are recognizing income???!?!? The beginning of the explanation even says the shareholder would recognize $200k dividend income — but later concludes as “the shareholder’s taxable income would not change”. — also contradicting the above rules?
What am I missing here… this is not making any sense.. help?!
"The mind can only absorb as much as the seat can take"
B - 79
A - 68, __ (got bumped from Aug 4 release to Aug 23-THANKS AICPA)
R - Oct
F - Nov (HA! 1 month to study working full-time; love NTS rules)
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