Paladin 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,Maria Mendez.The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000.Maria assumed a liability of $25,000 attached to the land.The tax consequences of the distribution to Paladin in year 1 would be:
A)No loss recognized and a reduction in E&P of $200,000.
B)$50,000 loss recognized and a reduction in E&P of $200,000.
C)$50,000 loss recognized and a reduction in E&P of $225,000.
D)No loss recognized and a reduction in E&P of $225,000.

Question

Quizplus · Accepted Answer

Paladin Corporation does not recognize a loss on the distribution of property to a shareholder. The reduction in E&P is the fair market value of the land ($200,000) minus the liability assumed by Maria ($25,000), resulting in a net reduction of $175,000. However, the E&P basis of the land was $250,000, so the reduction in E&P is $250,000 - $25,000 = $225,000.

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