Question

When an S corporation shareholder receives a property distribution (no previous E&P), the shareholder will reduce their basis in the S corp stock by the:

a. The Fair Market Value of the Property Received
b. The Shareholder's Adjusted Basis in the Property Received
c. The Stock's Par Value
d. The Original Issue Price of the Stock

Answer 1

When an S corporation distributes property to a shareholder, the shareholder reduces their stock basis by the property's fair market value, which keeps track of the shareholder's investment in the corporation post-distribution.

Step-by-step explanation:

When an S corporation shareholder receives a property distribution and the corporation has no previous earnings and profits (E&P), the shareholder will reduce their basis in the S corp stock by the fair market value (FMV) of the property received.

This reduction in basis ensures that the shareholder's investment measurement is adjusted for the distribution they have received; it prevents double taxation by ensuring that when the property or the stock is ultimately sold, the gain or loss reflected will be based on the adjusted basis.