Question

Illini corporation reported taxable income of $500,000 from operations for this year. During the year, the company made a distribution of an automobile to its sole shareholder, Carly Urbana. The auto’s fair market value was $30,000, and its tax basis to Illini was $0. The auto’s E&P basis was $15,000. Illini had accumulated E&P of $1,500,000.

a) Compute Illini's taxable income and federal income tax

Taxable Income= ?

Federal Income Tax= ?

b) Compute Illini's current E&P

Current E&P= ?

c) What is Carly's tax basis in the auto she received from Illini?

Tax Basis= ?

Answer 1

ANSWER

a)

Taxable Income = $4,85,000

Federal Income Tax = $1,01,850

Explanation :

Taxable income from operations	$5,00,000
Gain on distribution of Auto ($30,000-$15,000)	$15,000
Total taxable income	$4,85,000
Federal income tax ($4,85,000 x 21%)	$1,01,850

b)

Illini's Current E & P = $3,83,150

Explanation :

Taxable income	$4,85,000
Less:
Federal income tax	($1,01,850)
Adjustment for E&P gain on distribution of Auto	0
Current E&P	$3,83,150

c)

  Carly’s tax basis in the auto she received from Illini =$30,000

Explanation :

Tax basis in the auto Carly received from Illini = Fair Market Value of the Auto

= $30,000

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