Question

Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to one of its shareholders. The property was subject to a $230,000 mortgage, which the shareholder assumed. Global has ample E & P to cover any distribution made during the year. What is the amount of the shareholder's dividend income on the distribution? What is the shareholder's basis in the property received?

Answer 1

Answer:

1. The amount of the shareholder's dividend income on the distribution is $620,000.

2. The shareholder's basis in the property received is $850,000.

Explanation:

1. What is the amount of the shareholder's dividend income on the distribution?

From the question, it is stated that the property distributed was subject to a $230,000 mortgage which the shareholder assumed. This implies that the shareholder has taken up responsibility of paying off the mortgage loan. This will reduce the amount of dividend paid to the shareholder as follows:

Shareholder's dividend income = $850,000 - $230,000 = $620,000.

Therefore, the amount of the shareholder's dividend income on the distribution is $620,000.

2. What is the shareholder's basis in the property received?

When property is distributed to shareholders, the shareholder's basis in the distributed property is considered to be the fair market value (FMV) of the distributed property and it will be treated as if the distribution had been made in cash.

Therefore, the shareholder's basis in the property received is $850,000 which its fair market value.