December 31 balance sheet of the RST General Partnership reads as follows. 20. The Cash Receivables Adjusted Basis $ 65,000 FMV S 65,000 Capital and S 1231 assets 7,500 100,000 Total Roy, capital S 40,000 S 57,500 S172,500 Sue, capital Ted, capital 40,000 40,000 57,500 57.500 Total $120,000 $172,500 The partners share equally in partnership capital, income, gain, loss, deduction and credit. Ted's adjusted basis for his partnership interest is $40,000. On December 31 Ted retires from the partnership, receiving a $60,000 cash payment in liquidation of his interest. The partnership agreement states that $2,500 of payment is for goodwill. Which of the following statements about this distribution is false? a. If capital is NOT a material income-producing factor to the partnership, the $ 736(a) payment will be $2,500. 736(b) property b. If capital is a material income-producing factor, the entire $60,000 payment will be a payment. c. The payment for d. The partnership can deduct any amount that is a $ 736(a) payment because it will be determined without regard to partnership profits. e. All statements are false. PART II: Prepare appropriate response or solution to the problems below. 1. Amanda 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 however, Pebble earned a significant profit, taxable income was $240,000. Consequently, Pebble made two cash distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000 December 31. The following information might be relevant to determining the tax treatment of the distributions $340,000. This year This year's taxable income included a net operating loss carryover of $50,000. The corporation's Federal income tax liability is $72,000 for the year Pebble paid nondeductible fines and kickbacks of $10,000. The company also paid nondeductible life insurance premiums of $22,000. The cash surrender value of the corporate-owned life insurance policies increased by $11,000 during the year The company sold a piece of equipment during the year and reported a S 1231 gain of $105,000 and recapture income under $1245 of $35,000. There were no other 1231 transactions during the year, but the corporation did have a capital loss carryforward of $30,000 MACRS depreciation exceeds E & P depreciation by $14,000. In addition, an election under S 179 was made this year for $18,000 of assets a. Compute Pebble's E & P for the year b. What are the tax consequences of the two distributions made during the year to Martha (her stock basis is $74,000)
