This year, Corporation Z distributed land held for investment to its sole individual shareholder.The land was worth $100,000 (basis $70,000) and was subject to a liability of $40,000.Assuming the corporation has substantial earnings and profits, and ignoring the effect of any taxes on the distribution, the net effect of the transaction on E&P will be a decrease of

Question

Quizplus · Accepted Answer

The net effect on E&P is a decrease of $30,000, calculated as the fair market value of the land ($100,000) minus the liability assumed by the shareholder ($40,000), resulting in a net distribution of $60,000. Since the basis of the land is $70,000, the decrease in E&P is the difference between the net distribution ($60,000) and the basis ($70,000), which equals $10,000. However, the correct calculation involves considering the fair market value of the land without subtracting the liability for E&P purposes, leading to a decrease in E&P by the difference between the fair market value ($100,000) and the basis ($70,000), which is $30,000. My initial explanation contained a calculation error. The correct approach to determine the effect on E&P involves the difference between the fair market value and the basis of the land.

This Year, Corporation Z Distributed Land Held for Investment to Its