Wineseller Corporation is owned by Mortimer Smith, its sole shareholder. Mortimer has a $20,000 basis in his Wineseller Corporation stock. Mortimer is in the 37% tax bracket. Wineseller Corporation is in the 21% tax bracket. Wineseller Corporation has the following balances as of December 31, 2021.Accumulated Earnings and Profits (AEP) ($600,000)Current Earnings and Profits $ 70,000On December 31, 2021, Wineseller Corporation distributes $160,000 to Mortimer.What are the tax consequences to Mortimer from receiving this distribution from Wineseller Corporation?

Distributions made by a corporation to its shareholders are treated as follows: 1. Treat as taxable dividend income up to the extent of higher ofCurrent E&PSum of accumulated E&P and Current E&P before distribution.2. Remaining dividends to the extent of shareholder's basis are treated as non taxable return of capital which reduce the shareholder's basis.3. Dividend in excess of E&P and shareholder's basis are taxable capital gain distribution. Distribution = $160,000 Accumulated Earnings and Profits (AEP) ($600,000) Current Earnings and Profits $ 70,000 Total of CEP and Accumulate E&P = ($530,000) equivalent to $0 Taxable dividend income = $70,000 Non taxable return of capital = $ 20,000 Taxable capital gain distribution = $70,000

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Wineseller Corporation is owned by Mortimer Smith, its sole shareholder. Mortimer has a $20,000 basis in his Wineseller Corporation stock. Mortimer is in the 37% tax bracket. Wineseller Corporation is in the 21% tax bracket.

Wineseller Corporation has the following balances as of December 31, 2021.

Accumulated Earnings and Profits (AEP) ($600,000)
Current Earnings and Profits $ 70,000

On December 31, 2021, Wineseller Corporation distributes $160,000 to Mortimer.

What are the tax consequences to Mortimer from receiving this distribution from Wineseller Corporation?

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