Question

When a loss occurs from a property distribution, no loss is recognized (even though it would be if sold instead of distributed). What about a gain?

A) Gain is recognized for both tax and E&P purposes
B) Gain is recognized for tax purposes, but not for E&P
C) Gain is recognized for E&P purposes, but not for tax
D) No gain is recognized for both tax and E&P purposes

Answer 1

A gain from property distribution is recognized for tax purposes but not for E&P purposes, indicating that the corporation must pay taxes on the gain but it won't affect the calculation of Earnings and Profits. The correct answer to the question is B).

Step-by-step explanation:

When a gain occurs from a property distribution, the treatment for tax and Earnings and Profits (E&P) purposes may diverge. The correct answer to the question is B) Gain is recognized for tax purposes, but not for E&P. This means that for tax purposes, if a corporation distributes property to a shareholder and the property has appreciated in value (there is a gain), the corporation must recognize this gain and it is subject to taxation. However, this gain is not considered when calculating the corporation's Earnings and Profits, which is a measure used to determine the ability of a corporation to pay dividends.