Wills Corporation, which has accumulated a current E&P totaling $65,000, distributes land to its sole shareholder, an individual. The land has an FMV of $75,000 and an adjusted basis of $55,000. The shareholder assumes a $15,000 liability associated with the land. The shareholder will recognize
A)$60,000 of dividend income and have a $60,000 basis in the land.
B)$65,000 of dividend income and have a $75,000 basis in the land.
C)$60,000 of dividend income and have a $75,000 basis in the land.
D)$65,000 of dividend income and have a $65,000 basis in the land.

Question

Quizplus · Accepted Answer

The distribution of the land will result in a dividend to the shareholder in the amount of the E&P balance, which is $65,000. The shareholder's basis in the land will be the adjusted basis of $55,000 plus the amount of the liability assumed, which is $15,000, for a total basis of $70,000. However, because the FMV of the land is higher than the adjusted basis, the shareholder must also recognize a gain equal to the difference of $20,000, which is included in the shareholder's basis. Therefore, the shareholder will have $60,000 of dividend income ($65,000 E&P balance reduced by $5,000 gain recognized) and a $75,000 basis in the land ($55,000 adjusted basis plus $15,000 liability assumed plus $5,000 gain recognized).

Wills Corporation, Which Has Accumulated a Current E&P Totaling $65,000