Question

Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is $20,000, the corporation distributes appreciated property worth $100,000 (basis of $20,000). Fred's taxable gain is:

1) $100,000.
2) $80,000.
3) $0.
4) $10,000.

Answer 1

Fred's taxable gain on the distribution of appreciated property from his S corporation is $80,000, calculated as the difference between the property's fair market value and the stock basis.

Step-by-step explanation:

The question involves a scenario where Fred is the sole shareholder of an S corporation and must determine the taxable gain on a distribution of appreciated property by the corporation. Fred's stock basis before the distribution is $20,000, and the property distributed has a fair market value of $100,000, with the same basis as the stock ($20,000). To compute the taxable gain, one must consider the difference between the fair market value of the property distributed and the basis of the stock.

The gain that Fred must recognize is the difference between the fair market value of the property ($100,000) and the basis of the stock ($20,000). Therefore, the taxable gain is $80,000, which is answer 2). It is essential to note that S corporations generally pass income, losses, deductions, and credits through to their shareholders for federal tax purposes.