Question

Tar Heel Corporation 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, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

Answer 1

Dividend of $90,000 and a tax basis in the land of $100,000

Step-by-step explanation:

The computation of the tax consequences of the distribution of tax is shown below:

As per the data given in the question,

Particulars Amount

E&P $500,000

Fair market value of land $100,000 (A)

Mortgage attached $10,000 (B)

Dividend $90,000 (A - B)

Tax basis in land $100,000

This derives that the dividend amount is of $90,000 and the tax basis for the land is $100,000