It's a very simple concept,

but it's almost harder to put it into words than to actually do it.

So if we just write down the three components,

here we see that the fair market value of the property was $189,000.

It had an adjusted basis of $154,000,

but it's subject to this liability or debt,

the mortgage, of $245,000.

And so we can easily see that the debt exceeds the liability amount.

So that means when we go to figure out the gain on this property,

we have to use the debt as the fair market value because the debt exceeds adjusted basis.

In other words, the amount realized will be $245,000.

Reason being someone else is on the hook for this amount.

In other words, it's worth $245,000 and a sense to somebody.

The adjusted basis is $154,000.

And so we calculate a realized gain of $91,000.

Sunchaser Shakery Corporation distributed a building to its only shareholder, Nicholas.

The building was worth $20,000 with a basis of

$30,000 and subject to a $6000 liability that Nicholas assumed.

Before considering this distribution,

Sunchaser had current E&P of $30,000 and accumulated E&P of zero.

And our goal is to compute current E&P after the property distribution.

So let's take a look at what we have here.

We have property with a fair market value of $20,000.

It has an adjusted basis of $30,000.

So we can clearly see that this property has actually depreciated in value.

However, this situation is different from the prior problems that we examined,

which were appreciated property.

So here we have no loss recognition.

The corporation is not allowed to recognize this loss.

They only are required to recognize gains.

So no loss recognition.

Thus, this particular $10,000 loss has no effect on E&P.

Much like before or unlike before,

the $9000 of gain and the prior problem immediately increased the E&P.

Here, this $10,000 loss does not affect E&P.

However, we still have to account for E&P when

trying to determine the tax effects of this particular distribution.

The loss on the distribution of property does not affect E&P,

but the distribution of property does affect E&P.

So decrease E&P by the adjusted basis of

the distributed property, net of liabilities.

And this is because it's depreciated property.

So we're told we have $30,000 of current E&P available,

and we're now going to reduce this by the adjusted basis of the property distributed,

which is 30,000, net of liabilities,

which we're told were $6000.

So it will reduce current E&P by this net amount of $24,000,

leaving us with our answer of $6000 of E&P after the distribution.