Volunteer Corporation reported taxable income of $510,000 from operations this year. The company paid federal income taxes of $173,400 on this taxable income.
During the year, the company made a distribution of land to its sole shareholder, Rocky Topp. The land's fair market value was $84,500 and its tax and E&P basis to Volunteer was $56,500. Rocky assumed a mortgage attached to the land of $16,900. Any gain from the distribution will be taxed at 34 percent.
The company had accumulated E&P of $866,000 at the beginning of the year.
a. Compute Volunteer's total taxable income and federal income tax.
b. Compute Volunteer's current E&P before the distribution.
c. Compute Volunteer's accumulated E&P at the beginning of next year.
d. What amount of dividend income does Rocky report as a result of the distribution?
e. What is Rocky's income tax basis in the land received from Volunteer?
The income earned by the tax payers on which tax is levied by the government is known as taxable income. This income is calculated by deducting allowable expenses from the total income earned during a specified period.
Answer and Explanation: 1
a. Calculation of total taxable income and federal income tax is as follows:
|Income from operations||510,000|
|Gain on land...|
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fromChapter 3 / Lesson 5
In this lesson, we'll discuss allowable deductions that reduce taxable income. You'll learn about each deduction and its limitations. We'll also explore how to calculate tax liability after subtracting deductions.