Question

Petrel Corporation has accumulated E & P of $85,000 at the beginning of the year. Its current-year taxable income is $320,000. On December 31, Petrel distributed business property (land: fair market value of $140,000, adjusted basis of $290,000) to Juan, its sole shareholder. Juan assumes a $70,000 liability on the property. Included in the determination of Petrel's current taxable income is $16,000 of income recognized from an installment sale in a previous year. In addition, the corporation incurred a Federal income tax liability of $67,200, it paid life insurance premiums of $4,500, and received term life insurance proceeds of $150,000 on the death of an officer.

Assume Petrel Corporation is taxed at the 21% tax rate.

a. What is Juan's gross income from the distribution?
$.70,000

b. What items are adjustments to Petrel's E & P?
1.   Taxable income: Adjustment-Added
2.   Proceeds of term life insurance: Adjustment-Added
3.   Federal income tax: Adjustment-Deducted
4.   Life insurance premiums: Adjustment-Deducted
5.   Property distribution: Adjustment-Deducted
6.   Installment sale income Adjustment-Deducted

The E & P of Petrel Corporation after the property distribution is $247,300 on December 31.

c. What is Juan's tax basis in the property received?
$.140,000

d. What happens if Petrel instead sells the property at its fair market value, used $70,000 of the proceeds to pay off the liability, and then distributed the remaining cash and any tax savings to Juan?

If Petrel had sold the business property at its fair market value, it would have a recognized loss of $________. After paying off the loan and any taxes associated with the sale, Juan receives a dividend of $_____. The E & P of Petrel Corporation after the property sale and distribution of cash to Juan is $_______.

just need the answer to D. thanks

Answer 1

Immediately following the property sale and distribution of cash, Petrel’s E & P balancewould be:Accumulated E & P at start of year$ 85,000Add:Taxable income (reduced by $150,000 loss)$170,000Proceeds of term life insurance150,000Subtract:Federal income tax ($112,000 – $58,500 tax savings)(53,500)Life insurance premiums(4,500)Cash distribution(128,500)Prior-year installment sale income(16,000)117,500E & P of Petrel after the distribution$202,500

Thus, Juan recognizes a taxable dividend of $128,500. Petrel’s E & P would be unchanged.