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

Answer 1

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

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)