In the Current Year, Red Corporation Has $100,000 of Current

question 73

Essay

In the current year, Red Corporation has $100,000 of current and accumulated E&P. On March 2, Red Corporation distributes to Randy, a shareholder, a parcel of land (a capital asset)having a $60,000 FMV. The land has a $30,000 adjusted basis (for both tax and E&P purposes)to Red Corporation and is subject to an $8,000 mortgage, which Randy assumes. Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income Randy recognizes as a result of the distribution?
b)What is Randy's basis for the land?
c)What is the amount and character of Red Corporation's gain or loss as a result of the distribution?
d)What effect does the distribution have on Red Corporation's E&P?

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Definitions:

Monetary Neutrality

The concept that changes in the money supply only affect nominal variables and have no long-term impact on real variables like output or employment.

Nominal Interest Rate

The interest rate before adjustments for inflation, representing the rate stated on a loan or investment.

Real Interest Rate

The inflation-adjusted interest rate, showcasing the actual borrowing cost and the genuine return for lenders or investors.

Shoeleather Costs

The metaphorical cost of time and effort that people spend trying to counteract the effects of inflation, such as holding less cash and making more frequent trips to the bank.