Purple Corporation makes a property distribution to its sole shareholder, Kyung. 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 Kyung 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

The taxable gain on the distribution of the house is equal to the amount of the mortgage assumed by the shareholder ($245,000) less the adjusted basis of the property distributed ($154,000), which equals $91,000. Since Purple's accumulated E & P is greater than the amount of the taxable gain ($140,000 > $91,000), the distribution will not generate any taxable income to Purple. Therefore, the correct answer is D.

Purple Corporation Makes a Property Distribution to Its Sole Shareholder