Montclair 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,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 year 1 would be (assume a 0 percent marginal tax rate for Montclair):
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 $175,000.
D)No gain recognized and a reduction in E&P of $175,000.

Question

Quizplus · Accepted Answer

Under the rules of corporate distributions, the amount of gain recognized by the corporation equals the lesser of the fair market value of the property distributed ($200,000) or the corporation's E&P ($500,000). Since the fair market value of the land is less than Montclair's E&P, the corporation will recognize a gain of $150,000 ($200,000 - $50,000 basis). The reduction in E&P will be equal to the fair market value of the property distributed ($200,000) less any liabilities assumed by the shareholder ($25,000), or $175,000. Therefore, choice C is the correct answer.

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