Kathryn, an individual, own all of the outstanding stock in Copper Corporation.

Question

Kathryn, an individual, own all of the outstanding stock in Copper Corporation. Kathryn purchased
her stock in Copper 11 years ago, and her basis is $18,000. At the beginning of this year, the
corporation has $38,000 of accumulated E &P and no current E&P (before considering
the effect of the distributions. What are the tax consequences to Kathryn
(amount and type of income and basis in property received) and Copper Corporation (gain or loss and effect on E&P)in each of the following situations?

e. Instead of distributing land, assume that Copper decides to distribute furniture used
in its business. The furniture has a $7,000 fair market value, a $600 adjusted basis for income
tax purposes, and a $2,600 adjusted basis for E&P purposes.
when the furniture was purchased four years ago, its original fair market value was $9,000.

NEED HELP! I HAVE NOT UNDERSTANDING OF THIS

Explanation / Answer

Cooper recognizes the gain on the distribution of $6400 for the income tax purposes ($7000 fair market value - $600 adjusted basis for the income tax purposes.) Current E&P is increased by $4400 ($7000 fair market value - $2600 adjust basis for the E&P). Kathryn receives $7000 dividend and takes a $7000 basis in the furniture. Cooper's E&P is reduced by $7000, leaving him with $35400 accumulated E&P at the start of the following year. ($38000 accumulated E&P + $4400 current E&P - $7000 distribution).

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