Elk Company Reports a Deficit in Current E&P of ($270,000)

question 101

Essay

Elk Company reports a deficit in current E&P of ($270,000) and positive accumulated E&P of $440,000. Elk distributed $340,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $127,500. What is the tax treatment of the distribution to Barney, and what is his tax basis in Elk stock after the distribution?

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Definitions:

Cash Distribution

The process of disbursing funds from a company, trust, or fund to its owners, partners, or investors.

Capital Balances

The amount of capital credited to the owners or partners in a company, reflecting their ownership interest.

Income Ratio

A financial metric that compares different aspects of an entity's income, showing the relationship between two or more income-related figures.

Capital Balance

The amount of money that a company has in its accounts, representing the capital owned by the investors or owners.