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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.
a.What are the tax consequences to Mortimer from receiving this distribution from Wineseller
Corporation?
b.How would your answer above be different if instead Wineseller Corporation had the following
balances:
Accumulated Earnings and Profits (AEP) $500,000
Current Earnings and Profits (480,000)
Assume that Mortimer still receives a distribution of $160,000 and has stock basis of
$20,000
c.Use the facts in part a, but assume that rather than cash, Mortimer received an asset with a fair
market value of $200,000 and a basis to the corporation of $120,000.
How much tax would Mortimer owe from this distribution?
What are the tax implications to Wineseller Corporation
Answer & Explanation
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