Question

Yuke corporation distributed equipment with a fair market value of $10,000 and an adjusted basis of $2000 to its sole shareholder Lulu. Yuke has $15000 E & P before the distribution. 1) compute the E & P balance of Yuke after the distribution? 2) Determine the Lulu basis in the equipment she received?

Answer 1

Part 1)

As the distribution has resulted in a gain of $8,000 (10,000 - 2,000), the current E&P will increase by the amount of the gain. The amount so arrive after adjusting for gain will thereafter be reduced by the fair value of the property so distributed. The E & P balance of Yuke after the distribution is determined as below:

Current E&P Balance before Distribution	15,000
Add Gain on Distribution (10,000 - 2,000)	8,000
Less Fair Market Value of Equipment Distributed	-10,000
E&P Balance after Distribution	$13,000

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Part 2)

The value of Lulu's basis in the equipment received on the date of distribution will be the same as the fair market value of the equipment so distributed. Therefore, Lulu's basis in the equipment would be $10,000.