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A.) Elk Company reports current E&P of $100,000 and negative accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney’s tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution? B.) Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of 34%. The dividend meets the requirements to be a “qualified dividend” and Mary is subject to a tax rate of 15% on the dividend, what is the total federal income tax imposed on the corporate income earned by Superior and distributed to Mary as a dividend?
Expert Answer
A.
Since ELK company E&P is $100,000 so to the extent of $100,000 will be treated as dividend and a tax basis in ELK stock of is -25,000 (75000-100000) or in other words there is capital gain of $25,000.
B.
Tax on income 1,000,000*.34/(1-.34) = $515,152
So tax paid on earning of 100,000 is $51,515
Tax on dividend of 100,000*15% is $15,000
Total Federal Tax is $66,515
