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What impact does distribution have on earnings and profits

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Question: Manning Corporation has two shareholders who are brothers: Eli owns 60% of the stock and Peyton owns the remaining 40%. Eli and Peyton have a basis in their stock of $60,000 and $40,000, respectively. As of December 31, 2018, Manning Corporation owns the following

assets:

Asset Basis FMV

Cash 30,000 30,000

Land 12,000 20,000

Equipment 40,000 30,000

Both the land and the equipment are used in the operation of the family business.

The equipment has accumulated depreciation of $10,000. Eli had contributed the equipment to the corporation in 2013 when it had a value of $70,000 and basis of $60,000.

The corporation's earnings and profits (determined before considering the effects of the distributions) are allocable to Eli and Peyton as follows:

Eli Peyton

Current Earnings and Profits 3,000 2,000

Accumulated Earning and Profits 24,000 16,000

Part 1: Assume that on December 31, 2019 Manning Corporation distributes the land to Eli.

What impact does this distribution have on earnings and profits? How much do Eli and Peyton get in distributions?

Reference no: EM132720332

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