Barry and Lynette Majors own 36 percent of the outstanding stock of Echo Valley, which has approximately $5 million earnings and profits. Echo Valley owns 38 tracts of undeveloped land in central Colorado. Barry and Lynette want to acquire one of the tracts (tract D6) to develop as a campground and recreational park. The appraised FMV of tract D6 is $420,000 although the corporation’s tax basis is only $211,000. At the most recent shareholder meeting, Barry and Lynette convinced the other share-holders to distribute tract D6 to them as a dividend. (The other shareholders would receive equivalent cash dividends proportionate to their stock ownership.) Would the distribution of tract D6 as a dividend be a taxable event to Echo Valley? How much dividend income would the Majors recognize, and what would be their tax basis in tract D6?
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