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

The Catamount Company cannot recognize a loss on the distribution of land to a shareholder. The correct treatment is no loss recognized and a reduction in E&P by the basis amount of $250,000.

Step-by-step explanation:

The subject question is dealing with the tax consequences for the Catamount Company, which made a distribution of land to its shareholder in the context of current and accumulated E&P. According to the tax code, a corporation cannot recognize a loss on property distributions to shareholders. Therefore, although the land was distributed at a fair market value ($200,000) that is less than the company's tax and E&P basis ($250,000), no loss can be recognized. The correct tax treatment would be the no recognition of loss and the reduction of E&P by the basis of the land to the corporation, which is $250,000. Therefore, answer a. No loss recognized and a reduction in E&P of $250,000 is the correct answer.