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The Tax Court ruled that the value of the property was 5 million, the amount the corporation would have received had it sold the property in its entirety to the shareholders at its FMV.
No loss is recognized at the corporate level when an S corporation distributes property with an FMV that is less than its basis. Because the loss on property distributed when its basis exceeds its FMV is unrecognized, and because stock basis and AAA may be reduced by the unrecognized loss, distributions of such property should be avoided. Although the property’s FMV is less than its basis, no loss is recognized at the corporate level.
(Conversely, a loss can be recognized if the distribution is in liquidation of the corporation.) Generally, stock basis and accumulated adjustments accounts (AAAs) are reduced by corporate expenses and losses that are neither deductible nor capitalizable (Sec. The transaction is considered to be a distribution in the amount of the equipment’s FMV—$20,000.
If property is distributed, the amount of the distribution is considered to be the property’s fair market value (FMV) (Sec. The tax attributes of the distribution are generally determined as if the distribution had been made in cash. The gain passes through to the shareholders and increases their basis in their stock.
When appreciated property (property that has an FMV in excess of its adjusted basis) is distributed, gain is recognized in the same manner as if the S corporation had sold the property to the shareholders at its FMV (Sec. No loss is allowed, however, if the distributed property has an FMV that is less than the corporation’s tax basis in such property. 336, a loss can be recognized if the distribution is in liquidation of the corporation.) The shareholder’s basis in the distributed property is its FMV (Sec. , a gain of $20,000 (FMV of $20,000 less basis of zero) will be recognized at the corporate level.
In many liquidating Chapter 11 retail bankruptcies, the debtor retains a lease broker to try to maximize the value of their leased property while at the same time limiting landlord’s claims arising from the breach of the lease caused by store closures.
However, Bon Ton does not appear to have retained a real estate broker.
Landlords in particular are assessing rights under their respective leases.
The Bankruptcy Code has special rules relating to leases, some of which benefit a landlord, but others that significantly limit a landlord’s rights.
This can cause other shareholders to report gain from the transaction.