Question

Please answer fully, typed if possible and show all work and relevant citations 5) Puce Corporation,...

Please answer fully, typed if possible and show all work and relevant citations

5) Puce Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six

years As a result, it has a deficit in accumulated E & P at the beginning of the year of

$340,000. This year, however, Puce earned a significant profit, taxable income was $240,000.

Consequently, Puce 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.

Puce 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 cauyforward of

$30,000.

MACRS depreciation exceeds E & P depreciation by $14,000. addition, an election

under 179 was made this year for $18,000 of assets.

What are the tax consequences of the two distributions made during the year to Martha

(her stock basis is $74,000)'?

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Homework Answers

Answer #1

Taxable income

240000

Net operating loss carryover

50000

Federal income tax

(72000)

Fines and kickbacks

(10000)

Life insurance premiums

(22000)

Cash surrender value of life insurance

11000

Capital loss carryforward

30000

Excess of MACRS depreciation over E & P depreciation

14000

Section 179 expense (80% ×$18,000)

14400

Current E & P

255400

Martha’s dividend = current E & P = $255400

Distributions during the year exceed current E & P = distributions – current E & P = 350000-255400 = $94600

Martha’s stock basis = $0

Martha’s capital gain = $20600 (94600-74000)

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