Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 year 1.On December 31,the company made a distribution of land to its sole shareholder,Tom Jefferson.The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000.The tax consequences of the distribution to Cavalier in year 1 would be (assume a 0 percent marginal tax rate for Cavalier):
A)No gain recognized and a reduction in E&P of $200,000.
B)$150,000 gain recognized and a reduction in E&P of $200,000.
C)$150,000 gain recognized and a reduction in E&P of $50,000.
D)No gain recognized and a reduction in E&P of $50,000.

Question

Quizplus · Accepted Answer

Cavalier Corporation recognizes a gain of $150,000 (FMV $200,000 - basis $50,000) on the distribution of land, which increases E&P by the gain amount. The distribution reduces E&P by the FMV of the land, $200,000.

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