Goose Corporation makes a property distribution to its sole shareholder,Michael.The property distributed is a hunting cabin (fair market value of $270,000;basis of $220,000)that is subject to a $350,000 mortgage which Michael assumes.Before considering the consequences of the distribution,Goose's current E & P is $50,000 and its accumulated E & P is 200,000.Goose makes no other distributions during the current year.What is Goose's taxable gain on the distribution of the cabin?

Question

Quizplus · Accepted Answer

The taxable gain on the distribution of the cabin is calculated as follows:

FMV of the property distributed: $270,000
Less: Adjusted basis of the property: ($220,000)
Taxable gain: $50,000

However, since the property is subject to a mortgage that Michael assumes, Michael is treated as receiving a cash distribution from Goose in the amount of the mortgage assumed, which is $350,000.

The distribution of the hunting cabin reduces Goose's accumulated E&P by the amount of the distribution ($270,000), leaving accumulated E&P of $-70,000. This deficit does not affect the taxability of the distribution.

Since Goose has current E&P of $50,000, Michael can receive a dividend of this amount tax-free. The remaining $120,000 ($170,000 - $50,000) is treated as a long-term capital gain to Michael, since Goose has no current or accumulated E&P to cover the distribution.

Therefore, the taxable gain on the distribution of the cabin is $120,000.

Goose Corporation Makes a Property Distribution to Its Sole Shareholder,Michael