Taxation

Purple Corporation has accumulated E & P of $65,000 at the beginning of the DECISION MAKING year. Its current-year taxable income is $320,000. On December 31, Purple distributed business property (worth $140,000, adjusted basis of $290,000) to Peter, its sole shareholder. Peter assumes an $80,000 liability on the property. Included in the determination of Purple’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 $3,500, and received term life insurance proceeds of $55,000 on the death of an officer.

a. What is Peter’s taxable income?

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b. What is the E & P of Purple Corporation after the property distribution?

c. What is Peter’s tax basis in the property received?

d. How would your answers to (a) and (b) change if Purple had sold the property at its fair market value, used $80,000 of the proceeds to pay off the liability, and then distributed the remaining cash and any tax savings to Peter?

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