Question

Catamount Company 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, 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 year

1 would be:
A) No loss recognized and a reduction in E&P of $250,000.
B) No loss recognized and a reduction in E&P of $200,000.
C) $50,000 loss recognized and a reduction in E&P of $150,000.
D) $50,000 loss recognized and a reduction in E&P of $250,000.

Answer 1

The tax consequences of the distribution to Catamount in year 1 would be a $50,000 loss recognized and a reduction in E&P of $250,000.

Step-by-step explanation:

The tax consequences of the distribution to Catamount in year 1 would be a $50,000 loss recognized and a reduction in E&P of $250,000.

When Catamount made the distribution of land to Caroline West, a loss of $50,000 was recognized because the fair market value of the land ($200,000) was less than the tax and E&P basis to Catamount ($250,000). This loss reduces Catamount's accumulated E&P by $250,000.