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?

a. Copper distributions land to Kathryn. The land was held as an investment
and has a fair market value of $28,000 and an adjusted basis of $21,000>

In this situation, when Copper Corporation distributes land to Kathryn, she will recognize a gain on the distribution. The amount of the gain will be the difference between the fair market value of the land ($28,000) and her adjusted basis in the stock ($18,000). Therefore, the gain recognized by Kathryn will be $10,000 ($28,000 - $18,000).

The type of income Kathryn will report is a capital gain since the land was held as an investment. Capital gains are taxed at different rates depending on the holding period. Since Kathryn held the stock in Copper Corporation for more than one year (11 years in this case), the gain will be considered a long-term capital gain. The tax rate for long-term capital gains varies depending on the taxpayer's taxable income.

Additionally, the basis of the property received (the land) by Kathryn will equal its fair market value at the time of distribution. So, Kathryn's basis in the received land will be $28,000.

As for Copper Corporation, they will recognize a loss on the distribution. The loss recognized by Copper Corporation will be the difference between the fair market value of the land ($28,000) and its adjusted basis in the land ($21,000). Therefore, Copper Corporation will recognize a loss of $7,000 ($21,000 - $28,000).

Regarding the effect on Copper Corporation's accumulated E&P, there will be no impact on the accumulated E&P because the distribution is considered a nondividend distribution. The corporation distributed property with a fair market value ($28,000) that exceeds its adjusted basis ($21,000). Therefore, the distribution does not come out of the accumulated E&P.