Pelican Corporation has E & P of $260,000. It distributes land with a fair market value of $80,000 (adjusted basis of $30,000) to its sole shareholder, Bernard. The land is subject to a liability of $45,000 that Bernard assumes. Bernard has a taxable dividend of:
A) $10,000.
B) $35,000.
C) $55,000.
D) $80,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Bernard's dividend would be the fair market value of the land ($80,000) minus the adjusted basis ($30,000), which equals $50,000. However, since Bernard assumes the liability of $45,000, his taxable dividend is reduced to $5,000. Therefore, the correct answer is B, with a taxable dividend of $35,000 ($5,000 in cash and $30,000 in assumed liability).

Pelican Corporation Has E & P of $260,000