Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000 . Current E & P is $500,000 . With respect to the distribution, which of the following statements is correct?
a. Rust has a gain of $15,000 and Andre has dividend income of $350,000.
b. Rust has a gain of $145,000 and Andre's basis in the distributed property is $130,000.
c. Rust has a gain of $130,000 and Andre's basis in the distributed property is $350,000.
d. Rust has a gain of $145,000 and Andre has dividend income of $130,000.
e. None of the above.
d
RATIONALE: The dividend income received by Andre equals the fair market value of the property received ($350,000) reduced by any liabilities transferred to her ($220,000). Thus, Andre has received dividend income of $130,000 . His basis in the property is equal to its fair market value, or $350,000 . The corporation's gain on the distribution equals the excess of fair market value over the adjusted basis of the property, or $145,000 ($350,000 – $205,000).
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