Final answer:
A distribution by a corporation to its only shareholder results in a capital gain when the distribution is in the form of property and the fair market value of the property exceeds the shareholder's basis in the corporation's stock. Cash distributions are typically considered dividends or return of capital, which do not result in immediate taxation and reduce the shareholder's stock basis instead.
Step-by-step explanation:
Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain? The correct answer is B) When the distribution is in the form of property. This scenario can lead to a capital gain if the fair market value (FMV) of the property received is greater than the shareholder's basis in the shares at the time of distribution. Essentially, if the value of the property (as of the distribution date) exceeds the amount the investor has invested (basis) in the corporation's stock, the excess is treated as a capital gain.
It's important to note that cash distributions typically do not result in capital gains; they are often treated as dividends or a return of capital if they do not exceed the shareholder's stock basis. Return of capital is not immediately taxable; instead, it reduces the shareholder's basis in the stock. When property is distributed, the transaction could trigger a capital gain if the property's value has appreciated beyond the cost basis of the shares. This gain realizes when the shareholder sells the asset unless other tax regulations apply.
The increase in the stock value (or any asset) between when one buys and sells it defines a capital gain. For example, buying a share of stock for $45 and later selling it for $60 represents a $15 capital gain—the difference between the purchase price (or basis) and the selling price.