Montclair 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, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in year 1 would be:
A) No gain recognized and a reduction in E&P of $200,000
B) $150,000 gain recognized and a reduction in E&P of $200,000
C) $150,000 gain recognized and a reduction in E&P of $175,000
D) No gain recognized and a reduction in E&P of $175,000

Question

Quizplus · Accepted Answer

The distributing corporation recognizes gain on the distribution, which is included in E&P, net of tax, and reduces E&P by the land's fair market value less the liability assumed by the shareholder.

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