Tar Heel Corporation had current and accumulated E&P of $500,000 at December 3120X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

Question

Quizplus · Accepted Answer

The distribution of the land is considered a dividend to the sole shareholder, William Roy. The amount of the dividend is calculated as the fair market value of the land, which is $100,000, minus any liabilities assumed by the shareholder, which is $10,000 for the mortgage. Therefore, the dividend is $90,000 ($100,000 - $10,000).

The tax basis in the land for William Roy is equal to the tax and E&P basis of the land to Tar Heel, which is $25,000. Since the land has been distributed to William Roy at its fair market value, his tax basis is increased to the fair market value of $100,000.

Therefore, the tax consequences of the distribution to William in 20X3 would be a dividend of $90,000 and a tax basis in the land of $100,000.

Tar Heel Corporation Had Current and Accumulated E&P of $500,000