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:

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

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

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