On May 15 of the current year, Quick Corporation
distributes to its shareholder Calvin a building having a $250,000 FMV and used in Quick’s business. The building originally cost $180,000. Quick claimed $30,000 of straight-line depreciation, so that the adjusted basis of the building on the date of distribution
for taxable income purposes is $150,000. The adjusted basis of the building for E&P purposes is $160,000. The building is subject to an $80,000 mortgage, which Calvin assumes. Quick has an E&P balance exceeding the amount distributed and is subject to a 34% marginal tax rate.
a. What are the amount and character of the income Calvin recognizes as a result of the distribution?
What is Calvin’s basis in the building?
c. What are the amount and character of Quick’s gain or loss as a result of the distribution?
What effect does the distribution
have on Quick’s E&P?