Teal Corporation Distribution of Property: Understanding Corporate Gain

What does Teal Corporation's distribution of property with a higher fair market value than its basis lead to?

a. Corporate loss

b. Corporate gain

c. No impact on corporation

Answer:

b. Corporate gain

Teal Corporation's distribution of property with a basis of $150,000 and a fair market value of $400,000 to Grace results in corporate gain. This means that the corporation has gained financially from the transaction.

The E & P (Earnings and Profits) of $2,000,000 indicates the corporation's ability to pay dividends to its shareholders without returning any capital. It is important to understand that the distribution of property with a higher fair market value than its basis leads to corporate gain in this scenario.

Grace's ownership of 15% of the outstanding Teal shares does not impact the basis of the property or the E & P calculation.