Question

Montclair Corporation had current and accumulated E&P of $500,000 at December 31, year 1. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The

tax consequences of the distribution to Montclair in year 1 would be:
A) $150,000 gain recognized and a reduction in E&P of $200,000.
B) $150,000 gain recognized and a reduction in E&P of $175,000.
C) No gain recognized and a reduction in E&P of $200,000.
D) No gain recognized and a reduction in E&P of $175,000.

Answer 1

Montclair Corporation recognizes a gain of $150,000 and reduces its E&P by $175,000 due to the distribution of land to a shareholder, taking into account the fair market value of the land, its basis to the corporation, and the liability assumed by the shareholder.

Step-by-step explanation:

The student question is asking about the tax consequences of a property distribution by Montclair Corporation to its shareholder, considering both the gain recognized on the distribution and its effect on earnings and profits (E&P). Since the land's fair market value was $200,000, which was distributed to the shareholder, and the land had a basis of $50,000 to Montclair, the corporation would recognize a gain of $150,000 ($200,000 fair market value minus $50,000 basis). Additionally, the shareholder assumed a liability of $25,000, which reduces the amount considered to be distributed for E&P purposes to $175,000 ($200,000 - $25,000 liability). Therefore, the correct tax consequences for Montclair in year 1 would be a recognized gain of $150,000 and a reduction in E&P of $175,000.