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:
A. No loss recognized and a reduction in E&P of $250,000

B. $50,000 loss recognized and a reduction in E&P of $250,000

C. $50,000 loss recognized and a reduction in E&P of $150,000

D. No loss recognized and a reduction in E&P of $200,000

Answer 1

Answer:

D. No loss recognized and a reduction in E&P of $200,000

Explanation:

Given that:

• Current and accumulated E&P : $500,000
• A distribution of land to its sole shareholder: $200,000
• E&P basis to Catamount :  $250,000

From that, we can see that the current and accumulated E&P is greater than its distribution of land so no loss would be reported so there will be reduction in earning and profits of the company of $200,000.

Hope it will find you well.