Lisbon Corporation has E & P of $75,000.It distributes land with a fair market value of $60,000 (adjusted basis of $25,000) to its sole shareholder, Josiah.The land is subject to a liability of $20,000 that Josiah assumes.

Question

Quizplus · Accepted Answer

When a corporation distributes property to a shareholder, the distribution is generally treated as a dividend to the extent of the corporation's earnings and profits (E&P), and then as a return of capital to the extent of the shareholder’s basis in the stock. In this case, since the E&P of the corporation is $75,000 and the fair market value of the land distributed is $60,000, the distribution would be treated as a dividend of $60,000. However, since Josiah assumes a liability of $20,000, his taxable dividend would be reduced by that amount, resulting in a taxable dividend of $40,000 ($60,000 - $20,000). Additionally, Josiah's basis in the land would be stepped up to its fair market value of $60,000.

Lisbon Corporation Has E & P of $75,000