Question

Tar Heel Corporation had current and accumulated E&P of $550,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $150,000 and its tax and E&P basis to Tar Heel was $30,000. William assumed a mortgage attached to the land of $12,500. The tax consequences of the distribution to William in 20X3 would be:______A) 100,000 dividend and a tax basis in the land of $100,000

B) $100,000 dividend and a tax basis in the land of $90,000
C) Dividend of $90,000 and a tax basis in the land of $100,000
D) Dividend of $90,000 and a tax basis in the land of $90,000

Answer 1

The right answer is not within the options given, therefore, the answer is Dividend of $137,500 and a tax basis in the land of $150,000

Step-by-step explanation:

It can be observed that the accumulated Earnings and profit can gracefully accommodate the fair market value of $150,000. Nevertheless, to calculate the dividend, we remove the mortgage value of the land ($12,500) from the fair value of the land ($150,000).

This is shown below:

Assuming that

A = E&P ($550,000 )

B = land's fair market value ($150,000 )

C = mortgage attached ($12,500 )

D = Dividend ( B-C) ($137,500 )

X = Tax basis in the land = (B) ==> ($150,000 )

Therefore, we have a Dividend of $137,500 and a tax basis in the land of $150,000