Briefly discuss the rules related to distributions of non-cash property

Answer 1

Amounts distributed as dividends in the form of property rather than cash are measured by the fair market value of the property on the date of distribution. This amount is reduced by any liabilities associated with the property that are assumed by the shareholder. A shareholder's basis in the distributed property is its fair market value on the distribution date. Under § 311(b), gain (but not loss) is recognized to a corporation that distributes property as a dividend.

The distribution of appreciated property is treated as if the property were sold to the shareholder at its fair market value. If the property distributed is subject to a liability, or if the shareholder assumes a liability that exceeds the basis of the distributed property, the fair market value of the property will not be less than the amount of the liability (and this deemed fair market value will also be the basis of the property in the shareholder's hands).

The distributing corporation's E & P is increased by any gain recognized on the appreciated property distributed. The distributing corporation's E & P is reduced by the greater of the fair market value or the adjusted basis of the property distributed less the amount of any liability on the property.