Final answer:
The recognized gain or loss on a distribution is the difference between the asset's fair market value and the corporation's adjusted basis. The shareholder's basis for the land is its fair market value at distribution. Capital gains occur when an investor sells an asset for more than its initial purchase price.
Step-by-step explanation:
Kelly Corporation's president should understand that the amount of recognized gain or loss on a distribution is determined by the difference between the fair market value of the asset distributed (in this case, land) and the corporation's adjusted basis in the land. If the fair market value exceeds the adjusted basis, there is a gain. If it is less, there is a loss. The shareholder's basis for the land is typically the fair market value at the time of distribution.
The concept of capital gain is relevant here, which refers to the increase in the value of an asset between when it is bought and when it is sold. Similarly, when the corporation distributes an asset like land to shareholders, they will later have a capital gain or loss when they sell it, depending on the land's value compared to their basis in it.
As for when a company issues stock, the rate of return for investors can come either as a dividend or as a capital gain when they sell the stock for more than they bought it. This impacts how the corporation might need to structure its finances to appeal to potential investors and maintain shareholder value.