option 1 earnings and profits

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Option #1: Earnings and Profits

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.

a. Compute Pebble’s E & P for the year.

b. 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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