Question - Puce 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, 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 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.
Answer:
1. Compute Puce's E & P for the year.
2. What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $74,000)?