Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. 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:
A)$100,000 dividend and a tax basis in the land of $100,000.
B)$100,000 dividend and a tax basis in the land of $90,000.
C)Dividend of $90,000 and a tax basis in the land of $100,000.
D)Dividend of $90,000 and a tax basis in the land of $90,000.

Question

Quizplus · Accepted Answer

The distribution is considered a dividend to the extent of the corporation's current and accumulated E&P, which is $500,000. The dividend value is the fair market value of the land ($100,000) minus the mortgage assumed by William ($10,000), resulting in a $90,000 dividend. William's tax basis in the land is its fair market value of $100,000.

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