Pebble Corporation, an Accrual Basis Taxpayer, Has Struggled to Survive

question 24

Essay

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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Definitions:

Sexual Arousal

The physical and emotional state of being stimulated or excited sexually, which can lead to various physiological responses.

Multiorgasmic

The capability of having multiple orgasms during a single sexual arousal period.

Muscular Contractions

The process where muscles become shorter and tighter to produce movement or maintain posture.

Refractory Period

The period of time following an action potential during which a neuron or muscle is incapable of generating another action potential.