Aztec, a C corporation, distributed an asset to Burn, a shareholder. The asset had a fair market value of $30,000 and was subject to a $40,000 liability, assumed by Burn. The asset had an adjusted basis of $25,000. What amount of gain must Aztec recognize?
a. $0
b. $15,000
c. $5,000
d. $10,000
Explanation
Choice “b” is correct. When a corporation distributes assets to a shareholder, the corporation recognizes a gain as if it had sold the asset. The gain is calculated as follows:
$40,000 Amount realized (Greater of FMV of asset OR Liability assumed by the shareholder)
-$25,000 Less: Adjusted basis of property sold
$15,000 Realized and recognized gain
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Choices “a”, “c”, and “d” are incorrect per the above explanation.
I took into account the {1st} exception here that when it's over 80% ownership, no G/L recognized.
However, {per 2nd exception} since liability assumed is more than the adjusted basis, a gain is recognized. I've seen two formulas for gain and I am not so sure when to use them appropriately.
a) FMV — AB = Gain
b) Amt. Realized* — AB = Gain ……………………… ( *Greater of FMV or Liability Assumed)
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