During 2019, CDE Corporation (an S corporation since its inception in 2017) distributed a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?
What will be an ideal response?
CDE recognizes $50,000 of gain on the distribution ($80,000 fair market value ? $30,000 basis), which is allocated (and taxable) to Clark. Clark must also recognize a $20,000 long-term capital gain on the distribution because the $80,000 distribution exceeds his basis in the stock by $20,000 ($10,000 beginning stock basis + $50,000 taxable income allocated from CDE ? $80,000 distribution). This excess distribution is a treated as a long-term capital gain because Clark has held his CDE stock for more than a year. Clark's stock basis in his CDE stock is $0 after accounting for the distribution.
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