Problem
Trumpeter Corporation, an accrual basis taxpayer, has lost money (undoubtedly as a tax plan) since its formation. At the start of the year, it has amassed a deficit in accumulated E&P of $340,000. This year, while the founder was distracted, Trumpeter generated taxable income of $240,000. Consequently, it made cash distributions to Donald, 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 paid $72,000 in federal tax for the year.
· Trumpeter 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 carry-forward of $30,000.
· MACRS depreciation was $30,000; E & P depreciation was $16,000. In addition, an election under § 179 was made this year for $18,000 of assets.
2.
a. Compute Trumpeter's E & P for the year.
b. What are the tax consequences of the two distributions made during the year to Donald (his stock basis is $74,000)?