Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:

Question

Quizplus · Accepted Answer

For tax purposes, losses on distributions of property to shareholders are not recognized. The E&P is reduced by the fair market value of the property distributed, less any liability assumed by the shareholder. In this case, the E&P reduction is the fair market value of $200,000 minus the $25,000 liability assumed by Maria, totaling a $175,000 reduction in E&P. However, the correct answer should reflect the principles behind the options provided, indicating a misunderstanding in the explanation. Given the options, the closest correct approach under typical tax principles would be to not recognize a loss and adjust E&P based on the distribution net of liability, but none of the options perfectly align with standard tax treatment principles. The provided explanation intended to clarify the general rule but incorrectly calculated the reduction in E&P. The correct approach according to the options would be to not recognize a loss and adjust E&P by the fair market value of the land distributed, considering the liability assumed, which is not directly reflected in the options given.

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