Montclair 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, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:

Question

Quizplus · Accepted Answer

The distribution of the land represents a property distribution. The taxable amount of a property distribution is the lesser of the property's fair market value or the corporation's E&P. In this case, the taxable amount is $200,000, which is the fair market value of the land. The corporation will recognize a $150,000 gain ($200,000 - $50,000 basis) on the distribution.

In addition, the corporation's E&P will be reduced by the amount of the distribution ($200,000) minus any liabilities assumed by the shareholder ($25,000). Therefore, the reduction in E&P will be $175,000.

Montclair Corporation Had Current and Accumulated E&P of $500,000 at December