Purple Corporation makes a property distribution to its sole shareholder,Paul.The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution,Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?
A)$0
B)$21,000
C)$35,000
D)$91,000
E)None of the above

Question

Quizplus · Accepted Answer

Purple Corporation recognizes a taxable gain on the distribution equal to the fair market value of the house minus its basis, which is $189,000 - $154,000 = $35,000. However, since the mortgage exceeds the fair market value, the gain is increased by the excess liability over the fair market value, which is $245,000 - $189,000 = $56,000. Therefore, the total taxable gain is $35,000 + $56,000 = $91,000.

Purple Corporation Makes a Property Distribution to Its Sole Shareholder,Paul