In the Current Year, Pearl Corporation Has $300,000 of Current

question 9

Essay

In the current year, Pearl Corporation has $300,000 of current and accumulated E&P. On June 3, Pearl Corporation distributes a parcel of land (a capital asset)worth $120,000 to Betty, a shareholder. The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage, which Betty assumes. Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income recognized by Betty as a result of the distribution?
b)What is Betty's basis for the land?
c)What is the amount and character of Pearl's gain or loss as a result of the distribution?
d)What effect does the distribution have on Pearl's E&P?

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Definitions:

Exports

Goods or services produced in one country and sold to buyers in another, contributing to the selling country's national income.

Imports

Goods or services brought into one country from another for sale or use.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision or choosing between options.

Comparative Advantage

The ability of an individual, firm, or country to produce a certain good or service at a lower opportunity cost than others.