solution

Corporate Distribution

In 2021, Elko, Inc. has $200,000 in accumulated earnings and profits and $(180,000) in current earning and profits. On December 31, 2021, Elko distributes $ 60,000 to Emma, an individual. Emma has stock basis of $5,000 in her Elko stock and is in the 32% tax bracket. Emma does not have any capital gains or losses from the sale of assets.

Determine:

• How much of this distribution to Emma is dividend, return of capital, and/or capital gain?

• What is Emma’s 2021 tax liability for this distribution?

Assume instead that Emma is Emma Corporation (a C corporation). Emma Corporation owns 25% of Elko Corporation. What tax liability will Emma Corporation have on the distribution (assume that Emma Corporation has significant income in addition to this distribution from Elko).