Purple Corporation makes a property distribution to its sole shareholder, Kyung. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Kyung assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple's taxable gain on the distribution of the house?
A) $0
B) $21,000
C) $35,000
D) $91,000
E) None of these.

Question

Quizplus · Accepted Answer

Purple Corporation recognizes a gain to the extent that the liability ($245,000) assumed by Kyung exceeds the corporation's basis in the property ($154,000). The taxable gain is therefore $245,000 - $154,000 = $91,000.

Purple Corporation Makes a Property Distribution to Its Sole Shareholder