Catamount Company 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, Caroline West.The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000.The tax consequences of the distribution to Catamount in year 1 would be:
A)No loss recognized and a reduction in E&P of $250,000.
B)$50,000 tax and E&P loss recognized and a reduction in E&P of $250,000.
C)$50,000 tax and E&P loss recognized and a reduction in E&P of $150,000.
D)No loss recognized and a reduction in E&P of $200,000.

Question

Quizplus · Accepted Answer

For tax purposes, losses on distributions of property to shareholders are not recognized. Therefore, Catamount cannot recognize the $50,000 loss ($250,000 basis - $200,000 fair market value). The reduction in E&P is based on the property's basis to the corporation, which is $250,000, not its fair market value.

Catamount Company Had Current and Accumulated E&P of $500,000 at December