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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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L Corporation has accumulated Earnings and Profits of December 31, 2004, of ($200,000). During the year ended December 31,2005, it has taxable income and current Earning and Profits from operations of $20,000. During 2005 it distributes land with a fair market value of $100,000 and basis of $75,000 to M, and individual stockholder. The land is subject to a mortgage of $30,000) which is assumed by M. M's basis in L Corporation stock is $10,000.
1. What if any, is the tax effect on L Corporation Resulting from the distribution?
2.What basis will M have in the land received?
3. How will the distribution be taxed to M?
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

1. The corporation will have a gain based on the excess of FMV over basis just as if it had sold the property. The excess of FMV over debt will be treated as a distribution (dividend) from the corp to the shareholder.


2. $100,000


3. His total "net" distribution ($100,000 FMV - $30,000 debt assumed = $70,000) will be taxed in three parts. To the extent of current E&P, there will be a dividend ($20,000). The next $10,000 (equal to his basis in the stock) will be a "return of capital". The balance will be taxed as a distribution in excess of basis. For tax purposes this is treated as a sale of stock and will result in a $40,000 as a capital gain.


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