Cavalier Corporation had current and accumulated E&P of $500,000 at December 31, year 1.On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson.The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000.The tax consequences of the distribution to Cavalier in year 1 would be (assume a 0 percent marginal tax rate for Cavalier):
A)No gain recognized and a reduction in E&P of $200,000.
B)$150,000 tax and E&P gain recognized and a reduction in E&P of $200,000.
C)$150,000 tax and E&P gain recognized and a reduction in E&P of $50,000.
D)No gain recognized and a reduction in E&P of $50,000.

Question

Quizplus · Accepted Answer

When a corporation distributes property as a dividend, it must recognize gain as if it had sold the property for its fair market value. In this case, Cavalier Corporation would recognize a gain of $150,000 ($200,000 fair market value - $50,000 basis). This gain increases both tax and E&P. However, the distribution reduces E&P by the fair market value of the distributed property, which is $200,000.

Cavalier Corporation Had Current and Accumulated E&P of $500,000 at December