Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution o

Question

Cavalier 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, Tom Jefferson. The land’s fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 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 $50,000

D. No gain recognized and a reduction in E&P of $50,000

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Gianna 1 week 2021-11-26T03:50:48+00:00 1 Answer 0

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    2021-11-26T03:52:25+00:00

    Answer:

    B. $150,000 gain recognized and a reduction in E&P of $200,000

    Step-by-step explanation:

    The gain recognized = market value of assets – tax and E&P basis related = $200,000 – $50,000 = $150,000

    The distribution of land also reduce the accumulated E&P, the reduced amount is the fair valued of asset distributed ($200,000)

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