Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end,
Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend
distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an
adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both
Brisk and the shareholder change if land were distributed instead of cash?
1. Brisks taxable income
2. Shareholders taxable income
Increase/no effect/ stay the same
Rule: The taxable amount of a dividend to a shareholder from a corporation's earnings and profits is the
amount received in cash or the fair market value of the property received .
Rule: The general rule is the payment of a dividend does not create a taxable event, unless the distribution is appreciated property. When the distribution is of appreciated property, the corporation recognizes gain as if
the property were sold at fair market value.
Choice "b" is correct. If Brisk Corp. were to distribute $200,000 of accumulated earnings and profits in cash
as a dividend, the shareholder would recognize $200,000 in dividend income, and the corporation would
reduce its earnings and profits by $200,000. If, instead , the dividend were the $200,000 FMV land with a
basis of $75,000, the shareholder would still recognize $200,000 of dividend income (the FMV of the property
received, as per the above rule), but the corporation would recognize a gain of $125,000 on the distribution
($200,000 FMV - $75,000 basis, per the above rule), the corporation's earnings and profits would increase
$125,000, and the corporation would reduce its earnings and profits by the $200,000 dividend distribution.
Thus, Brisk's taxable income would increase if the land were distributed , but the shareholder's taxable income
would not change.