Question

Ace Cards, Inc., with E&P of $79,500, distributed land held as an investment with a basis of $21,000, subject to a mortgage of $38,000, but worth $58,000, to a shareholder, a trust.
(a.) What adjustment is made to E&P?
(b.) What is the amount of the dividend?
(c.) What is the trust's basis in the land?
(d.) Answer questions (a), (b), and (c), assuming that the shareholder is a corporation.

Answer 1

Given that the basis is 21000.

Fair market value is 58000.

Liability is 38000.

a) adjustment in e&p:

Since the basis is less than the fair market value, the gain that would be recognised by the company is the difference between the fair market value and the basis I.e., 58000-21000= 37000. that should be added to the e&p

B) amount of dividend:

Since the fair market value is 58000 and the mortgage is only 38000. It means that the share holder is getting the 58000 worth of land freely along with 38000 worth of liability I e. Net benefit of 20000(58000-38000). So, the dividend is , 20000.

C) trust's basis in the land:

The trust's basis in the land is the fair market value of the land. That is the 58000 as given In the question.

D) if the shareholder is a corporation:

After the tax reform act 1986, the end result for the distribution to both the corporate and non corporate shareholder is the same. So, the gain to be recognised is 37000. The dividend is 20000. The basis is lesser of fair value or basis plus gain = lower of 58000 or (21000+37000)= 58000.

The answers are same for both corporate and non corporate shareholders.

Hope it helps

Thank u.