Yes, it’s treated as if the S Corp sold the property to the shareholder for FMV and the S Corp recognizes gain. Losses on distributions where FMV < Adjusted Basis are disallowed and reduce the shareholder’s stock basis. Shareholder’s basis in distributed property is FMV whether gain or loss.
So the S corporation recognizes a gain on property distribution to shareholder (FMV – Basis = lets say $10k), the shareholders basis increases by $10k (if this shareholder owns 100% of the stock), and then the shareholders basis decreases by the FMV of the property distributed from the S Corporation?
+Income items (separately and nonseparately stated) – this section would include the 10k
+Additional shareholder investments in corp stock
-Distributions to shareholders – this section would include the FMV of property received
-Loss or expense – loss could only be taken up to the basis (which includes the amount of loans to corporation o/s)
whoa! what if the property distributed to the S shareholder was initially the ownership of a C corporation and it had a built-in-gain? Then the corporation would be taxed on the gain at the C level! Plus the shareholder would pay taxes on that gain as well..there goes the double taxation again!