Question

Catamount Company 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, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be:

Answer 1

It could have an impact of -50.000 in the E&P sheet

Step-by-step explanation:

It could have an impact of -50.000 in the E&P sheet. This impact is possible if the company decides to make a new record prior the written off of the assets (land), updating the fair market value in -50.000 (debit E&P, and credit in Assets in the balance sheet). With this record, the profit of the company would be 450.000 and not 500.000. It is also possible to avoid any impact on the E&P sheet by writing off the assets based in 250.000 and making a debit in the equity (reserves). In any case, the net impact in the balance sheet will be the same, -250.000 Assets, -250.000 Equity.