Question

Pebble Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six years ago. As a result, it has a deficit in accumulated E & P at the beginning of the year of $340,000. This year, however, Pebble earned a significant profit; taxable income was $240,000. Consequently, Pebble made two cash distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000 December 31. The following information might be relevant to determining the tax treatment of the distributions.

• This year’s taxable income included a net operating loss carryover of $50,000.

• The corporation’s Federal income tax liability is $72,000 for the year.

• Pebble paid nondeductible fines and kickbacks of $10,000. The company also paid nondeductible life insurance premiums of $22,000.

• The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year.

• The company sold a piece of equipment during the year and reported a § 1231 gain of $105,000 and recapture income under § 1245 of $35,000. There were no other § 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000.

• MACRS depreciation exceeds E & P depreciation by $14,000. In addition, an election under § 179 was made this year for $18,000 of assets.

1.Compute Pebble's E & P for the year. (show your work)

2. What are the full tax consequences of the two distributions made during the year to Martha (her stock basis is $74,000)?

Answer 1

Pebble Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six years ago.

Pebble corporation an tax payer, has struggled annual basis to survive since its formation six year ago. a) computee Pebble's E &p for the year. 240.000 Taxable income net operating loss Cowy over 50,000 --72000 Federal incom tax - 22000 -10.000 llooo life insurance Premiums fines and kick backs. Surmeder value of Insurance capital loss carry forward Ele depreciation Section 179 expense (18000 * goy) 30,000 14:00 14400 255400 6 what are the tax consequences of the two distributions made during the year to martha The amount in current e te cill be 255,500. excess of distributions over Curroot E pcoill be $ 350,000-$255400) 95,600 which results to reduction in Martha's stock basis by $o. Year Martha has capital gain which is equal to $ qu, 6oo exceeds the stock basis.