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 (worth $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 $112,000, paid life insurance premiums of $4,500, and received term life insurance proceeds of $150,000 on the death of an officer.
a. What is Juan’s gross income from the distribution?
b. What is Petrel’s E & P after the property distribution?
c. What is Juan’s tax basis in the property received?
d. How would your answers to (a) and (b) change if Petrel had sold the property at its fair market value, used $70,000 of the proceeds to pay off the liability, and distributed the remaining cash and any tax savings to Juan?