Question

Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purple’s current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purple’s taxable gain on the distribution of the house?

A. $0
B. $21,000
C. $35,000
D. $91,000
E. None of the above

Answer 1

Answer:

D. $91,000

Explanation:

Since the Distributed Property (House) is subject to a liability in excess of basis, the fair market value is treated as not being less than the amount of liability:

Purple has a gain of;

Liability - Basis

$245,000 - $154,000

$91,000

Hence the Taxable Gain would be of $91,000