Cayenne 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 $310,000.This year,however,the tide was turned and Cayenne earned a significant profit; taxable income was $210,000.To celebrate,Cayenne made two cash distributions to Marty,its sole shareholder.The first distribution,$130,000,was made on July 1.The second distribution,$180,000,was paid on December 31.Cayenne's accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions.

a.Compute Cayenne's E & P for the year using the above information.
b.What are the tax consequences of the two distributions made during the year to Marty? Assume Marty's stock basis is $65,000.

Question

Cayenne 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 $310,000.This year,however,the tide was turned and Cayenne earned a significant profit; taxable income was $210,000.To celebrate,Cayenne made two cash distributions to Marty,its sole shareholder.The first distribution,$130,000,was made on July 1.The second distribution,$180,000,was paid on December 31.Cayenne's accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions.
  
a.Compute Cayenne's E & P for the year using the above information.
b.What are the tax consequences of the two distributions made during the year to Marty? Assume Marty's stock basis is $65,000.

Quizplus · Accepted Answer

The Answer of Cayenne 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 $310,000.This year,however,the tide was turned and Cayenne earned a significant profit; taxable income was $210,000.To celebrate,Cayenne made two cash distributions to Marty,its sole shareholder.The first distribution,$130,000,was made on July 1.The second distribution,$180,000,was paid on December 31.Cayenne's accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions.
  
a.Compute Cayenne's E & P for the year using the above information.
b.What are the tax consequences of the two distributions made during the year to Marty? Assume Marty's stock basis is $65,000.

Cayenne Corporation,an Accrual Basis Taxpayer,has Struggled to Survive Since Its