Problem 4.1Non-Cash Distributions

Candy Corporation has two shareholders, Paul and Mary.

At January 1, 20x8, Paul and Mary each had a basis of $10,000 in their stock in Candy Corporation.

At January 1, 20x8, Candy Corporation had positive accumulated earnings and profits of $100,000.

On June 1, 20x8, Candy Corporation distributed $100,000 in cash to Paul and land worth $100,000 to Mary. Candy Corporation had paid cash of $40,000 for the land on January 1, 20x0 (and there have been no capitalizable improvements to the land since the acquisition).

Before taking into account the above distribution, Candy Corporation had earnings and profits of $50,000 for the 20x8 tax year.

1. What are the tax consequences to Candy Corporation as a result of the June 1 distributions?
2. What are the tax consequences to Mary as a result of the June 1 distribution (dont forget to note her basis and holding period in the land received)?
3. What is Candy Corporations accumulated earnings and profits at January 1, 20x9?
4. How would your answers for a) through c) change if Candy Corporation had paid $120,000 for the land (same market value at the date of distribution)?