Question

Purple Corporation makes a property distribution to its sole shareholder, Kyung. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Kyung assumes. Before considering the consequences of the distribution, Purple’s current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple’s taxable gain on the distribution of the house?

Answer 1

$91,000

Step-by-step explanation:

Purple has a gain of $91,000

= $245,000 - $154,000 = $91,000

($245,000 liability treated as fair market value –$154,000 basis)

NB: If property is subject to a liability(mortgage) over its basis, for purposes of determining gain on the property, the fair market value of the property is treated as being not less than the amount of the liability(mortgage).