Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen. The property is subject to a $50,000 mortgage, which Kathleen assumed. How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?
What will be an ideal response?
As a result of the distribution, Kathleen has a taxable dividend of $100,000 [$150,000 (fair market value) - $50,000 (liability)].The basis of the property to Kathleen is its fair market value, or $150,000.
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