Rule: IRC Section 311 controls the taxability of corporate distributions. An S corporation (and a C corporation) recognizes a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.

Choice "c" is correct. An S corporation cannot distribute appreciated property to its shareholders without gain. In general, a partnership can distribute appreciated property tax-free to its partners (in general, a non liquidating distribution to a partner is nontaxable). Since a limited liability company (LLC) is taxed like a partnership (an LLC properly structured and with two or more owners is taxed like a limited partnership with no general partners), a limited liability company can distribute appreciated property to its owners tax-free.

Choice "b" is incorrect. A limited liability company is a hybrid business entity that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership. With a partnership, there is no double taxation of profits. Neither is there with a limited liability company. There is no advantage for a limited liability company over an S corporation here.

Choice "d" is incorrect. Owners receive limited liability protection with both an S corporation and a limited liability company so there is no advantage for a limited liability company over an S corporation here.

Choice "a" is incorrect. Incentive stock options can be used to compensate owners with both an S corporation and a limited liability company. There is no entity restriction for these stock options, other than that they can be granted only by corporations. There is no advantage for a limited liability company over an S corporation here.