Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000 . Purple makes no other distributions during

the current year. What is Purple's taxable gain on the distribution of the house?
a. $0
b. $21,000
c. $35,000
d. $91,000
e. None of the above

d
RATIONALE: If distributed property is subject to a liability in excess of basis, for purposes of determining gain on the distribution, the fair market value of the property is treated as being not less than the amount of the liability. Purple has a gain of $91,000 ($245,000 liability treated as fair market value – $154,000 basis).