Question

Cavalier 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,

Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in year 1
would be:
A) No gain recognized and a reduction in E&P of $50,000.
B) $150,000 gain recognized and a reduction in E&P of $50,000. C) No gain recognized and a reduction in E&P of $200,000.
D) $150,000 gain recognized and a reduction in E&P of $200,000.

Answer 1

Cavalier Corporation will recognize a $150,000 gain for tax purposes and reduce its E&P by $200,000 after distributing land valued at $200,000 with a basis of $50,000 to its shareholders.

Step-by-step explanation:

The tax consequences of the distribution of land by Cavalier Corporation to its sole shareholder, Tom Jefferson, would include the recognition of a gain and an adjustment in Earnings and Profits (E&P). Specifically, since the land's fair market value is $200,000 and its tax and E&P basis to Cavalier is $50,000, the corporation would recognize a $150,000 gain for tax purposes.

This gain is calculated as the difference between the fair market value and the tax basis of the land. Furthermore, because distributions are made from E&P, the E&P would decrease by the fair market value of the land, which is $200,000 in this case. Therefore, the correct answer is that Cavalier Corporation would recognize a $150,000 gain and reduce its E&P by $200,000.