Question

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:

A) No loss recognized and a reduction in E&P of $225,000B) No loss recognized and a reduction in E&P of $200,000C) $50,000 loss recognized and a reduction in E&P of $200,000D) $50,000 loss recognized and a reduction in E&P of $225,000

Answer 1

Answer: Option (A) is correct.

Step-by-step explanation:

Given that,

Current and accumulated E&P = $500,000

Land's fair market value = $200,000

Tax and E&P basis = $250,000

Liability attached to the land = $25,000 (Assumed by maria)

Therefore,

Corporation Paladin will record a reduction in E&P of $225,000.

No loss shall be recognized in this transaction.